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Cost of debt using both methods (YTM and the tatos, 4
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Answer #1

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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