How do you calculate the average cost of capital (by hand) for the following bond issue?
$3,000,000 bond
30-year maturity
Sold at 95% of face value
11% coupon rate
2% of face value would be charged as an underwriting commission
Average Cost of Capital =(C+((FV-PV)/t))/((FV+PV)/2)
C=Annual Coupon Payment =11%*$3 million=$330,000
FV=Maturity Payment =$3,000,000
PV=Present Value of amount received at issuance =($3,000,000*95%)-(2%*$3,000,000)=$2,850,000-$60,000=$2,790,000
t= time period in years =30
(C+((FV-PV)/t))=330,000+((3,000,000-2,790,000)/30)=$330,000+$7,000=$337,000
((FV+PV)/2)=(3,000,000+2,790,000)/2=$2,895,000
Average Cost of Capital=$337,000/$2,895,000=0.12
Average Cost of Capital=12%
How do you calculate the average cost of capital (by hand) for the following bond issue?...
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