Final answer:
The before-tax component cost of debt for KatyDid Clothes is most likely closest to 12.78%, assuming the yield to maturity for their bond issue (selling at a premium) is less than the coupon rate of 14%.
Step-by-step explanation:
The question asks about calculating the before-tax component cost of debt for KatyDid Clothes based on its bond issue data. The company has a $140 million bond issue at 103 percent of par, with a 14 percent semiannual coupon rate. To determine the cost of debt, one should identify the current yield to maturity (YTM) that equates the present value of all future coupon payments and the repayment of par value at maturity to the current market price of the bond. The bond sells for 103 percent of par, meaning each bond sells for $1,030 ($1,000 * 103%). The 14 percent coupon rate translates to a $140 annual coupon payment ($1,000 * 14%) or $70 semiannually ($140 / 2).
While the question did not provide enough information to calculate the precise YTM, the answer choice closest to the typical YTM for a bond selling above par with given characteristics could be label b) 12.78%. This answer assumes that the YTM will be less than the coupon rate because the bond sells at a premium, and typically the coupon rate would exceed the YTM in such scenarios.
To have a clear answer, we would normally calculate the YTM through a financial calculator or a spreadsheet function, taking into account the current price, time to maturity, coupon rate, and the face value of the bond. Without such a calculation, we can infer that the cost of debt will likely be less than the coupon rate due to the bond selling at a premium, aligning closest with answer choice b).