The Watermelons Co has a bond outstanding that matures in 15 years, carries a 3

Question

The Watermelons Co has a bond outstanding that matures in 15 years, carries a 3 percent coupon, and pays interest annually. The bond has a market value of $1,045.50. The company has a corporate tax rate of 34 percent. What is the pre-tax cost of debt? Please show work

Explanation / Answer

=> here coupon payment = 3% of 1000 = $30 , n=15 => 1045.5 = 30/(1+r) +30/(1+r)^2+------+30/(1+r)^15 +1000/(1+r)^15 => r=2.63% therefore pre-tax cost of debt =2.63% after taxcost = 2.63%(1-t) = 2.63%(1-0.3)=1.84% ans: pre-tax cost of debt =2.63%

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