What is the market interest rate on XYZs debt and its compon

What is the market interest rate on XYZ’s debt and its component cost of debt? Please show work in Excel.

1. (12.5 Points) What is the market interest rate on XYZ\'s debt and its component cost of debt? 12% Coupon rate Coupons per year Years to maturity Price Face value Tax rate 15 $1,153.72 $1,000 40% Market Interest Rate Cost of Debt-

Solution

Solution:

Semi annual coupon rate = 12%/2 = 6%

Nos of semi annual period = 15*2 = 30

Let market rate of interest = i

At market rate of interest, present value of interest and principal will be equal to face value of bond.

Lets calculate present value of interst and principal at 5%

($1,000 * 6%) *cumulative PV factor at 5% for 30 periods + $1,000 * PV factor at 5% for 30th period

= $60 * 15.37245 + $1,000 * 0.231377 = $1,153.72

Therefore market rate of interest = 5%*2 = 10%

Cost of debt = Market rate of interest (1 - Tax rate) = 10% (1-0.40) = 6%