Birds and Yards has 10-year bonds outstanding that carry an annual coupon of 8 percent. The bonds mature in 7 years and are currently priced at 108.4 percent of face value. What is the firm's pre-tax cost of debt?

Question

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The correct answer is A because the pre-tax cost of debt is 6.47 percent. This is calculated using the following formula:Pre-tax cost of debt = (Coupon payment / Current bond price) + ((Face value - Current bond price) / (Current bond price * Years to maturity))= (0.08 * 1000) / (108.4 * 1000) + ((1000 - 108.4 * 1000) / (108.4 * 1000 * 7))= 0.0738 + 0.0064= 0.0802 or 8.02%

Birds and Yards Has 10-Year Bonds Outstanding That Carry an Annual