Question

Too Young, Inc., has a bond outstanding with a coupon rate of 6.2 percent and semiannual payments. The bond currently sells for $1,954 and matures in 22 years. The par value is $2,000. What is the company's pretax cost of debt?

Answer 1

Answer:

6.40%

Explanation:

For computing the pretax cost of debt, we have to apply the RATE formula that is shown in the attachment. Kindly find it below:

Given that,  

Present value = $1,954

Assuming figure - Future value or Face value = $2,000  

PMT = 2,000 × 6.2% ÷ 2 = $62

NPER = 22 years × 2 = 44 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative

So, after solving this, the pretax cost of debt is 6.40%

Answer 2

The company's pretax cost of debt is 6.40%.

In order to compute the pretax cost of debt, we have to apply the RATE function of MS Excel.

Information

Present value = $1,954

Future value /Face value = $2,000  

PMT = $62 (2,000 * 6.2%/2)

NPER = 44 years  (22 years × 2)

Pretax cost of debt = Rate(NPER;PMT;-PV;FV;type)  

Pretax cost of debt = Rate (44, 62, -1954, 2000, 0) * 2

Pretax cost of debt = 3.20 * 2

Pretax cost of debt = 6.40%

Hence, the pretax cost of debt is 6.40%.

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