Dunkin’ Donuts’ bonds currently sell for $1171.19 (for a $1K face-value bond). T

Question

Dunkin’ Donuts’ bonds currently sell for $1171.19 (for a $1K face-value bond). The bonds’ coupon rate is 10% and the bonds mature in 15 years. Coupons are annual. What is the yield to maturity for this bond? Multiple-choice answers include 6%, 8%, 10%, and 12%. Assuming a well-functioning competitive market, infer the bondholders’ current required rate of return. Thus, what is the before-tax cost of debt for Dunkin’ Donuts? If the company is in the 30% tax bracket, what is its after-tax cost of debt?

Explanation / Answer

Part 1 :

PV = 1171.19

FV =1000

PMT = coupon payment = 10% of 1000 = 100

nper = 15

So YTM = Yield to maturity =rate(nper,pmt,pv,fv) =rate(15.100,-1171.19,1000) = 8.00%

Yield to maturity = 8%

Part 2: After tax cost of debt = pre tax cost *(1-tax rate) = 8*(1-0.3) = 5.6%

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