XYZ Co has 1000 units of bonds outstanding. Each unit has $100 face value, 7% coupon rate with semi-annual payments, and 10 years to maturity. The risk-free rate is 3%, default risk premium is 2%, maturity risk premium for 10-year maturity is 1 %. XYZ is in the 25% tax bracket. You MUST label all your answers with numbers and alphabets such as 1.a, 1.b, 1.c, etc. 1. (a) Determine the required rate of return for its bonds, (b) the amount of tax savings, and (c) the after tax cost of debt.
