WC Inc. has a $10 million (face value), 10-year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt?
A) 9.00%
B) 9.10%
C) 9.16%
D) 18.32%

Question

Quizplus · Accepted Answer

The before-tax component cost of debt can be calculated using the following formula:

Before-tax Cost of debt = Annual Interest Payment / Bond Price

The annual interest payment can be calculated as 9% of the face value, which is $900,000 ($10 million x 9%). The bond price is 99% of the face value, which is $9.9 million ($10 million x 99%).

Before-tax Cost of Debt = $900,000 / $9,900,000 
= 0.0909 or 9.09%

Therefore, the before-tax component cost of debt for WC Inc. is 9.09%, which is closest to choice C (9.16%).

WC Inc Has a $10 Million (Face Value), 10-Year Bond Issue