KatyDid Clothes has a $180 million (face value) 25-year bond issue selling for 103 percent of par that carries a coupon rate of 7 percent, paid semiannually.What would be KatyDid's before-tax component cost of debt

 

Answer:

Before-tax cost of debt would be 6.75%

Step-by-step explanation

Face value = $180 million

Number of periods = 25 × 2 = 50

Current selling price = $180 million × 103% = $185.40 million

Semi-annual coupon payment = $180 million × {7% ÷ 2} = $6.30 million

Semi-annual yield to maturity (cost of debt) is computed using the equation given below:

Cost of debt = RATE (NPER, PMT, -PV, FV)

                    = RATE (50, $6300000, -$185400000, $180000000}

                    = 3.375%

Annual before-tax cost of debt = Semi-annual cost of debt × 2

                                                 = 3.375% × 2

                                                 = 6.75%

Hence, the before-tax cost of debt is 6.75%