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Ellie's Boutique has a bond issue outstanding that matures in fourteen years. The bonds pay interest...

Ellie's Boutique has a bond issue outstanding that matures in fourteen years. The bonds pay interest semi-annually. Currently, the bonds are priced at $780 and carry an 9 percent coupon. The face value of the bond is $1000. What is the firm's cost of debt? (Show your work for partial credit)

Solutions

Expert Solution

cost of debt = YTM of bond

YTM is calculated using RATE function in Excel with these inputs :

nper = 14*2 (14 years to maturity with 2 semiannual coupon payments each year)

pmt = 1000 * 9% / 2 (semiannual coupon payment = face value * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -780 (Current bond price. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 1000 (face value of the bond receivable on maturity. This is a positive figure as it is an inflow to the bondholder)

The RATE calculated is the semiannual YTM. To calculate the annual YTM, we multiply by 2.

cost of debt ==> 12.34%

jeff jeffy answered 2 years ago
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