10- 13.5 I need helo correcting part b of the problem Problem 13.15 (Part Level
ID: 2725885 • Letter: 1
Question
10- 13.5 I need helo correcting part b of the problem
Problem 13.15 (Part Level Submission) You know that the after-tax cost of debt capital for Bubbles Champagne is 6.20 percent. Assume that the firm has only one issue of five-year bonds outstanding. The bonds make semiannual coupon payments and the marginal tax rate is 30 percent. | (a) Your answer is correct. Calculate Pre-tax cost of debt capital. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) 3.86% Pre-tax cost of debt capital 8.86 %Explanation / Answer
Current price of bond is the present value of future cash flows from the bond discounted using pre-tax cost of debt as the discount rate. The future cash flows from a bond are the coupon payments to be received over the life of bond and the face value of bond to be received on maturity. If the coupon rate is equal to the cost of debt than the current price calculated shall be equal to the face value of bond.
In the question, the coupon rate and the pretax cost of debt are same as 8.86%
Hence, current price of bond = face value of bond = $1,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.