Question

Dunder-Mifflin, Inc.​ (DMI) is selling​ 600,000 bonds to raise money for the publication of new magazines in the coming year. The bond will pay a coupon rate of 13.3% with semiannual payments and will mature in 30 years. Its par value is ​$100. What is the cost of debt to DMI if the bonds raise the following amounts​ (ignoring issuing​ costs)?

a. $58,362,000

b. $55,602,000

c. $64,440,000

d. $72,414,000

a. What is the cost of debt to DMI if the bonds raise $58,362,000?

% (Round to two decimal​ places.)

b. What is the cost of debt to DMI if the bonds raise $55,602,000?

% (Round to two decimal​ places.)

c. What is the cost of debt to DMI if the bonds raise $64,440,000?

% (Round to two decimal​ places.)

d. What is the cost of debt to DMI if the bonds raise $72,414,000?

% (Round to two decimal​ places.)

Answer 1

Factual Data is reproduced below

Face Value of the bond - $100

Period = 30 years with semi annual payment. Hence period is 30*2 = 60

Coupon rate is 13.3% Annually. Since it's semi annual payment, interest rate is 13.3%/2 = 6.65%

Since we have the price, coupon rate, Face value data, we have to solve for the YTM to identify the Cost of debt.

Price of a bond = 6.65/YTM *(1-(1/(1+YTM)^60))+100/(1+YTM)^60.

This is complex formula. Instead we may work out the same using excel using the formula RATE

	Question 1	Question 2	Question 3	Question 4
Rate	To be calculated	To be calculated	To be calculated	To be calculated
nper	60	60	60	60
PMT	6.65	6.65	6.65	6.65
Total Value	$                    58,362,000.00	$                    55,602,000.00	$                    64,440,000.00	$                    72,414,000.00
No of bonds	600000	600000	600000	600000
Price	97.27	92.67	107.4	120.69
FV	100	100	100	100
Cost of debt	=rate(60,6.65,-97.27,100)	=rate(60,6.65,-92.67,100)	=rate(60,6.65,-107.4,100)	=rate(60,6.65,-120.69,100)
Cost of debt =	6.84%	7.18%	6.18%	5.47%