Answer:
6.37 %
Step-by-step explanation:
Debt in this case is represented by Bonds. The yield to maturity of a bond is the cost of debt. Yield to maturity is the interest rate used to determine Present Value of Coupons and Principle amount.
Most bond prices are expressed per $1,000. Therefore we will use this as the Face Value.
Pretax cost of debt calculation :
FV = $1,000
PV = $1,000 x 106 % = - $1,060
PMT = ($1,000 x 7 %) รท 2 = $35
N = 15 x 2 = 30
P/YR = 2
I/YR = ??
Using a financial calculator, the yield to maturity of the bond and hence the pretax cost of debt (i/yr) is 6.37 %