Greene Co. is planning a project for which it will issue new bonds. Bonds in the same risk class issued by another firm are currently priced at $954.90, have 25 years remaining to maturity, and pay coupons of $75 every year. If Greene's marginal tax rate is 34%, what is the pre-tax cost of debt for the project?

Question

Quizplus · Accepted Answer

The pre-tax cost of debt can be found using the yield to maturity (YTM) formula, which equates the present value of future cash flows (coupons and principal repayment) to the current price of the bond. Given the bond's price ($954.90), annual coupon ($75), years to maturity (25), and face value (typically $1000 for corporate bonds), the YTM can be calculated. The YTM in this case is approximately 7.92%, which represents the pre-tax cost of debt for Greene Co. This calculation involves solving for the interest rate that equates the present value of the bond's cash flows to its price, which is a common method for determining the cost of debt.

Greene Co Is Planning a Project for Which It Will Issue