Question

Cost of debt with fees. Kenny Enterprises will issue a bond with a par value of $1,000, a maturity of twenty years, and a coupon rate of 9.5% with semiannual payments, and will use an investment bank that charges $20 per bond for its services. What is the cost of debt for Kenny Enterprises at the following market prices? a. $963.99 b. $1,005.95 c. $1,117.44 d. $1,144.63 a. What is the cost of debt for Kenny Enterprises at a market price 5963.992 % (Round to two decimal places.)

Answer 1

Answer a.

Face Value = $1,000

Current Price = $963.99 - $20
Current Price = $943.99

Annual Coupon Rate = 9.50%
Semiannual Coupon Rate = 4.75%
Semiannual Coupon = 4.75% * $1,000
Semiannual Coupon = $47.50

Time to Maturity = 20 years
Semiannual Period to Maturity = 40

Let Semiannual YTM be i%

$943.99 = $47.50 * PVIFA(i%, 40) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -943.99
PMT = 47.50
FV = 1000

I = 5.080%

Semiannual YTM = 5.080%
Annual YTM = 2 * 5.080%
Annual YTM = 10.16%

Cost of Debt = Annual YTM
Cost of Debt = 10.16%

Answer b.

Face Value = $1,000
Semiannual Coupon = $47.50
Semiannual Period to Maturity = 40

Current Price = $1,005.95 - $20
Current Price = $985.95

Let Semiannual YTM be i%

$985.95 = $47.50 * PVIFA(i%, 40) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -985.95
PMT = 47.50
FV = 1000

I = 4.830%

Semiannual YTM = 4.830%
Annual YTM = 2 * 4.830%
Annual YTM = 9.66%

Cost of Debt = Annual YTM
Cost of Debt = 9.66%

Answer c.

Face Value = $1,000
Semiannual Coupon = $47.50
Semiannual Period to Maturity = 40

Current Price = $1,117.44 - $20
Current Price = $1,097.44

Let Semiannual YTM be i%

$1,097.44 = $47.50 * PVIFA(i%, 40) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -1097.44
PMT = 47.50
FV = 1000

I = 4.240%

Semiannual YTM = 4.240%
Annual YTM = 2 * 4.240%
Annual YTM = 8.48%

Cost of Debt = Annual YTM
Cost of Debt = 8.48%

Answer d.

Face Value = $1,000
Semiannual Coupon = $47.50
Semiannual Period to Maturity = 40

Current Price = $1,144.63 - $20
Current Price = $1,124.63

Let Semiannual YTM be i%

$1,124.63 = $47.50 * PVIFA(i%, 40) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -1124.63
PMT = 47.50
FV = 1000

I = 4.110%

Semiannual YTM = 4.110%
Annual YTM = 2 * 4.110%
Annual YTM = 8.22%

Cost of Debt = Annual YTM
Cost of Debt = 8.22%