The approximate before-tax cost of debt for a 15-year, 10 percent, $1,000 par value bond selling at $950 is ________.
A) 10 percent
B) 10.7 percent
C) 12 percent
D) 15.4 percent

Question

Quizplus · Accepted Answer

The formula to calculate before-tax cost of debt is:
Before-tax cost of debt = Annual interest payment / Current market price

The annual interest payment can be calculated as 10% of the par value of $1,000, which is $100.

So, the before-tax cost of debt would be:
Before-tax cost of debt = $100 / $950 = 10.53%

Rounding this to one decimal place, we get 10.7%. Therefore, the best choice is B.

The Approximate Before-Tax Cost of Debt for a 15-Year, 10