a. 9% coupon bond, face value $20 mill, maturity 10 yrs., yield to mat

QUESTION

a. 9% coupon bond, face value $20 mill, maturity 10 yrs., yield to maturity 10%, coupons paid annually.b. maturity 15%, coupon = annually, coupon rate = 10%, face value = $25 mill, issue sells for 94% of par1.what is the before tax cost of debt?2. what is the after tax cost of debt?
(1) What is the before tax cost of Debt: Coupon rate = 9ce Value of the bond = $20,000,000Number of years to maturity = 10 yearsYield to Maturity (YTM) = 10%Yield to Maturity is also called as Cost of Debt of the bond. Hence, before tax cost of debt of the bond is 10%.Before tax cost of the debt = 10% (2) What is the after tax cost of debt: Number of years to maturity = 15 yearsCoupon Rate = 10ce Value of the bond = $25,000,000Current Selling Value of the bond = 94% of ParCurrent Selling Value of the bond = [$25,000,000 * 94%]Current Selling Value of the bond = $23,500,000 Calcualting Yield to Maturity of the bond (or) Before Cost of Debt: Calculating Yield to Maturity of the bond (YTM):

g Ms-Excel “Rate” Function): Number of Periods to maturity of the bond (Nper) 15 Annual Coupon Rate of the bond (PMT) -2500000 Current Selling Value (or) Present Value of the bond (PV) 23500000 Par (or) Face (or) Future Value of the bond (FV) -25000000 Yield to Maturity of the bond (YTM) (or) (Rate) 10.83% Before-tax Cost of Debt of the bond = 10.83% Note: Here its not possible to calculate After-tax Cost of Debt, why because you are not given any income tax rate.

ANSWER:

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