Question

Contrail Air, Inc. is trying to determine its cost of debt. The company has an outstanding debt issue with 19 years to maturity that is quoted at 98.00% percent of face value. The issue makes semiannual payments and has a coupon rate of 9.00% percent. What is the pretax cost of debt?

Settlement	01/01/2000
Maturity	01/01/2019
Price (% of par)	98
Coupon rate	9%
Payments per year	2
Tax rate	35%

Answer 1

Pretax cost of debt is its YTM. At YTM bond price should be given 980 per $1000 face value. Using excel YTM is 9.225%

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (4.6125%,38 periods)	$                         45.00	17.77282	$                799.78
Present value of bond face amount -Present value (4.6125%,38 periods)	$                    1,000.00	0.18023	$                180.23
Bond price			$                980.01
Face value			$             1,000.00
Premium/(Discount)			$                 (19.99)
Interest amount:
Face value	1,000
Coupon/stated Rate of interest	9.000%
Frequency of payment(once in)	6 months
Interest amount	1000*0.09*6/12=		$                  45.00
Present value calculation:
yield to maturity/Effective rate	9.23%
Effective interest per period(i)	0.09225*6/12=		4.613%

Pre tax cost of debt is 9.225%