The outstanding debt of Berstin Corp. has eight years to maturity, a current yield of 7%, and a price of $85. What is the pretax cost of debt if the tax rate is 40%?
A) 5.1%
B) 5.9%
C) 8.5%
D) more information needed

Question

Quizplus · Accepted Answer

C) Current yield = Coupon / Price;
0.07 = Coupon / $85; hence, Coupon = 0.07 × $85 = $5.95.
Yield to maturity = Pretax cost of debt; 11ea84dc_f527_f7b9_9a63_895aeb3550ed_TB1316_00_TB1316_00

The Outstanding Debt of Berstin Corp