a.Information provided:
Par value= future value= $1,000
Market price= present value= $890
Time= 10 years
Coupon payment= $84
The yield to maturity on the new issue is calculated by entering the below in a financial calculator:
FV= 1,000
PV= -890
N= 10
PMT= 84
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 10.2061.
Therefore, the yield to maturity is 10.21%.
b.After tax cost of debt= Before tax cost of debt*(1 - tax rate)
= 10.21%*(1 - 0.30)
= 7.15%.
In case of any query, kindly comment on the solution.
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