Calculate the pre-tax cost of debt for a company

What is the firm's pre-tax cost of debt?

To calculate the pre-tax cost of debt, we need to use the bond's current price, coupon rate, and time to maturity. Can you help us calculate this?

Answer:

The pre-tax cost of debt for the company is 5.91%.

To calculate the pre-tax cost of debt, we first need to break down the information given in the question. The bonds were issued 5 years ago with a 20-year maturity period and a 6.0% semiannual coupon rate. The current bond price is quoted at 101.5% of the face value.

Now, let's calculate the pre-tax cost of debt using the formula:

Cost of Debt = (Annual Interest Payment / Bond Price) * 100

First, we calculate the semiannual interest payment:

Semiannual Interest Payment = (Coupon Rate * Face Value) / 2

Given that the Face Value is $1,000:

Semiannual Interest Payment = (0.06 * $1,000) / 2 = $30

Then, we find the Annual Interest Payment:

Annual Interest Payment = $30 * 2 = $60

Next, we calculate the Bond Price:

Bond Price = 101.5% * $1,000 = $1,015

Finally, we determine the pre-tax cost of debt:

Cost of Debt = ($60 / $1,015) * 100 = 5.91%

Therefore, the firm's pre-tax cost of debt is 5.91%.