I computed the cost of debt based on the yield to maturity (YTM) of the long-term corporate bonds of an airline company, and found an YTM of 3.55 %, using the formula: Price = CPN/YTM * (1- 1/(1+YTM^n...
I computed the cost of debt based on the yield to maturity (YTM) of the long-term corporate bonds of an airline company, and found an YTM of 3.55 %, using the formula: Price = CPN/YTM * (1- 1/(1+YTM^n) + FV/(1+YTM^n) and solving for YTM.
questions:
- what does this tell me?
- what assumptions is made using the formula?
- how does this number affect the company and their customers?
Homework Answers
1.
This is the marginal pre-tax cost of debt i.e., this is the coupon
rate required on new bonds or the rate of interest to be paid on
new bonds
2.
The cash flows are reinvested at the ytm and the bond is held till
maturity
3.
The company has to generate sufficient cash flows to meet the
interest payments. Higher the number higher is the cash flow
required by the company.
Add Answer to:
I computed the cost of debt based on the yield to maturity (YTM) of the long-term corporate bonds of an airline company, and found an YTM of 3.55 %, using the formula: Price = CPN/YTM * (1- 1/(1+YTM^n...
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a. The after-tax cost of debt using the bond's yield to maturity (YTM) is The after-tax...
a. The after-tax cost of debt using the bond's yield to
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The after-tax cost of debt using the approximation formula
is
b. The cost of preferred stock is
c. The cost of retained earnings is
The cost of new common stock is
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Using the cost of new common stock, the firm's WACC is
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a. The after-tax cost of debt using the bond's yield to
maturity (YTM) is
The after-tax cost of debt using the approximation formula
is
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Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call. A bond's current yield is calculated as the annual interest payment...
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need help with 1c and 2b.
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