In the case of Prescott Corporation, what is the pre-tax cost of debt using the bond's cash flow?

The pre-tax cost of debt represents the required return that lenders demand on the bond, based on its cash flows. To determine the pre-tax cost of debt, one typically calculates the yield to maturity (YTM) on the bonds, which considers the bond's current market price, coupon payments, and the time to maturity.

In the case of Prescott Corporation, if the calculated pre-tax cost of debt is 10.61%, this indicates that the yield reflects all future cash flows from the bond, including both the periodic coupon payments and the repayment of the face value at maturity, discounted back to the present value based on the bond's current market price.

The precise calculation involves using the bond's coupon rate, the bond's current price, the time remaining until maturity, and any differences between the bond's face value and market price. By effectively using these inputs, arriving at a cost of 10.61% signifies that it accurately captures the risk and return profile associated with Prescott Corporation's debt obligations in the context of prevailing market conditions.

Therefore, a pre-tax cost of debt of 10.61% showcases a more comprehensive view of the bond's yield based on its cash flow dynamics, making it the correct choice for this scenario