Wilson's Cabinets has bonds outstanding that mature in eight years, have a 6 % coupon and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,020. What is the company's pre-tax cost of debt?

Question

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The pre-tax cost of debt can be calculated using the yield to maturity (YTM) formula, which takes into account the annual coupon payments, the face value, the current market price, and the time to maturity. Given the bond's annual coupon of $60 (6% of $1000), a current price of $1020, a face value of $1000, and 8 years to maturity, the YTM calculation will yield a pre-tax cost of debt of approximately 5.68%. This calculation involves solving for the discount rate that equates the present value of all future cash flows (coupon payments and the repayment of the principal at maturity) to the bond's current price.

Wilson's Cabinets Has Bonds Outstanding That Mature in Eight Years