Madison Square Stores has a $20 million bond issue outstanding that currently has a market value...

Madison Square Stores has a $20 million bond issue outstanding that currently has a market value of $19.4 million. The bonds mature in 6.5 years and pay semiannual interest payments of $35 each. What is the firm's pretax cost of debt? 7.74 percent 7.80 percent 7.59 percent 7.08 percent 8.21 percent

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Expert Solution

Semi-annaul interest payment	35.00
Annaul interest payment	70.00
Face value	20 million
Market value	19.4 million
Assume face value	1000
Market value will be	970

Value of equation = 970 =35/(1-(1+r)^-13))+(1000/(1+r)^13	0.0774	0.078	0.0759	0.0708	0.0821
Maturity value formula	534.20101	537.18462	526.6295089	499.62989	556.90931






			YTM= (Interest-to be taken yearly+(Face value-market value)/n)/(face value+market value)/2	0.0757517

Pick 7.59%

jeff jeffy answered 2 years ago

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