a) Net proceeds from the bond are equal to bond sale price - floatation cost
=$1020 -$25
=$995
b) Calculation of YTM
PMT is coupon payment per year = 13% of 1000 = 130
YTM before tax is calculated in Excel using the RATE formula as:
=RATE(nper,pmt,pv,fv,,)
=RATE(10,130,-995,1000)
=13.09%
If before tax is 13.09%, then after tax is:
=13.09%(1-0.40)
=7.854%
c) cost of debt using approximation formula
the formula is:
cost of debt =[ Interest + (face value - net proceeds)/n ] / [(face value + net proceeds) / 2]
=[130 + (1000-995)/10] / [(1000+995)/2]
=13.083%
aftter tax is:
=13.083%(1-0.04)
=7.8496%
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