Question #30780

This Companyies only source of debt funding is by use of perpetual note. This note is currently pried at $55. The note pays quarterly interest on a $100 face value. Assume a constant nominal rate of 4% (in practice the rate changes over time). The total number of notes on issue equal 50000.
q1. Calculate the cost of debt for this company. (round to 4 decimal places)
The first part of this question asked for the cost of equity which is 9.69%.

Expert's answer

The cost of debt can't be calculated, because condition of the problem seems to be incorrect. If one note pays quarterly interest on a $100 face value, it means that dividends what we will get cover the price of note $ 55 almost two times. Therefore we wouldn't have any debt.

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