A company has a bond that has a $ 1000 (face value of bond) and a contract or coupon intrest of 11.5%.
The company's bond has a current market value of $ 1,124 and will mature in 10 years. The company's marginal tax rate is is 34%
What is the cost of capital from this bond debt?
ANSWER:
Cost of Capital for Company = Yield to maturity (YTM) * (1-Marginal Tax Rate)
YTM = (Annual interest+ (Par-Price of Bond )/Number of years until bond maturity )/(Bond par+price)/2
= (115+(1000+1124)/10)/1000+1124/2 =0.0966
Cost of Debt = 0.0966*(1-0.34)=0.063756
Friday, March 9, 2012
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