A firm has a previous debt issue on its balance sheet that pays coupons of 8% annually

Finance Aug 21, 2020

A firm has a previous debt issue on its balance sheet that pays coupons of 8% annually. Newer bonds with equivalent maturity would have 10% annual coupons in order to sell at par value. Based on this information, which statement is true? Select one: a. The existing bonds would sell for more than par value. b. The WACC calculation should use a value higher than 10% as the cost of debt. C. The WACC calculation should use 8% as the cost of debt. O d. The existing bonds would sell at discount.

Expert Solution

The correct answer is option "d".

The earlier bonds were offering a coupon rate of 8%, now in the market, the interest rate provided by other similar bonds is 10%. So an investor would not like to receive an interest of 8% when he can receive 10%. So the existing bond will sell at a discount.

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