MV of Bond1=Par value*bonds outstanding*%age of par |
MV of Bond1=1000*5300*1.02 |
=5406000 |
MV of Bond2=Par value*bonds outstanding*%age of par |
MV of Bond2=1000*9600*1.05 |
=10080000 |
Cost of debt |
Bond1 |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =7x2 |
1020 =∑ [(3.84*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^7x2 |
k=1 |
YTM1 = 3.5152024507 |
Bond2 |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =16x2 |
1050 =∑ [(6.61*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^16x2 |
k=1 |
YTM2 = 6.12 |
Firm cost of debt=YTM1*(MV bond1)/(MV bond1+MV bond2)+YTM2*(MV bond2)/(MV bond1+MV bond2) |
Firm cost of debt=3.5152024507*(5406000)/(5406000+10080000)+6.12*(5406000)/(5406000+10080000) |
Firm cost of debt=5.21% |
After tax cost of debt = cost of debt*(1-tax rate) |
After tax cost of debt = 5.21*(1-0.39) |
= 3.1781 |
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