KatyDid Clothes has a $150 million ($1000 face value) 15-year bond issue selling for 86% of par that carries a coupon rate of 8%, paid semi-annually. What would be KatyDid's before-tax component cost of debt?

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Quizplus · Accepted Answer

The before-tax component cost of debt is calculated using the yield to maturity (YTM) formula for bonds. Given the bond's selling price is 86% of par ($860), a coupon rate of 8% ($80 annually or $40 semi-annually), and a 15-year maturity, the YTM is approximately 9.80%.

KatyDid Clothes Has a $150 Million ($1000 Face Value) 15-Year