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Cost of Debt and Preferred Stock

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Franklin Mining has 15 yr, 8% annual coupon bond outstanding. Bond has a current market price of $885.54 and a face value of $1,000. If Franklin's marginal tax rate is 35% what is its relevant after-tax component cost of debt, rd (1-T)?
6.15%
9.46%
6.76%
6.40%
5.60%

I need to understand the detailed steps on how to approach a problem like this. Please give me detailed instructions. I will try to use excel, but I do not know how the formulas work.

Please help! Thank you.

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Solution Summary

The cost of debt and preferred stock is examined.

Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
Recent Feedback
  • "I got this feedback and I wanted to know if you can explain it to me. I noticed something within your workings which I believe is incorrect.  It looks like you've mistaken the Debt ratio for the Equity Multiplier.  You've done a calculation to determine Return on Equity (ROE) but if you take a look at the ratios provided for us you'll see ROE listed on the bottom line already.  You can use ROE, Profit Margin and Total Asset Turnover to figure out the Equity Multiplier amount.  Equity multiplier is not provided for us and we need to calculate it.  I really hope this is helpful to you.  "
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