Three years ago, the Fairchildress Co.issued 20-year, 7.75 percent semiannual coupon bonds at par.Today, the bonds are quoted at 102.6.What is this firm's pretax cost of debt?

Question

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The pretax cost of debt is the yield to maturity, which is calculated as follows:YTM = (C + (FV - PV) / N) / ((FV + PV) / 2)where:C = coupon paymentFV = face valuePV = present valueN = number of periods to maturityIn this case, the coupon payment is $77.50, the face value is $1,000, the present value is $1,026, and the number of periods to maturity is 40 (20 years * 2 semiannual periods per year).Plugging these values into the formula, we get:YTM = (77.50 + (1,000 - 1,026) / 40) / ((1,000 + 1,026) / 2)= 7.48%

Three Years Ago, the Fairchildress Co