Benge Automotive issued a corporate bond with a face value of $1,000, with a 10% annual coupon rate paid semiannually. The bond matures in 12 years and sells at a price of $1,080. What is the component cost of debt for use in the WACC calculation

The answer is 8.90%

Explanation:

Solution

Given that:

The bond face value =$1000

Annual coupon rate =10%

Maturity rate =12 years

Price sold at =1080

Now we find the component cost of debt for use

Thus

The debt (cost) = Yield to maturity

So

YTM = Annual interest payment + [(Face value - Present price / Years to maturity] / [0.6(Price of bond) + 0.4 (principal payment)]

= $100 + [($1000 - $1080) / 12] / [0.6 * $1080 + 0.4 * $1000]

= $100 - 6.67 / $1048

= $93.33 / $1048

= 0.0890 or 8.90%

Therefore the debt for use is 8.90%

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