CMA Study Group

HI Niladri,

Currently bond is trading 1040. In one year payment for this bond will be 1000 $ (face value) and coupon rate for one year 92. (9.2% X1000). Bonds mature in one year.
Thus to understand the cost we will need to know what 1040$ should be multiplied by to reach 1000$ +92$. This is 105%. Basically it's the same what is in your formula
1040 = (92+1000)/(1(100%) + cost of debt)
After tax of debt is calculated as cost of debt (5%) multiplied by (1 - tax rate). 

Hope clarified. 
BR

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Nadezda Vyazmenskaya
Director/Manager
Dubai
United Arab Emirates
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Original Message:
Sent: 02-07-2021 08:18 AM
From: NILADRI CHAKRABORTY
Subject: Please explain cost of debt

Q.  Some years ago the firm issued 10,000 bonds, each with a face value of $1,000 and paying an annual coupon rate of 9.2%. These bonds are now trading at $1,040 per bond. A coupon payment on these bonds was made yesterday and the bonds mature next year. • The firm has no other debt or preferred stock outstanding. The firm's corporate tax rate is 30%.

As per my calculation:

Cost of debt after tax = 92*0.70/1040 = 0.0619 = 6.19%

But in Wiley:

  

Price = $1040.00 = 92.00+1000 /(1+ cost of debt)       ( not understanding)

So, Cost of debt before tax = (1092/1040) - 1 = 5%

Therefore, After tax cost of debt = 5*(0.7) = 3.5%

Please explain, why we should recalculate the cost of debt in this way ? and why my calculation is wrong ?

Niladri,

I also got confused. And I am still confused, but here they have calculated YTM. Which is
((Face Value + Coupon)/MV)-1

I need to check back as to why YTM is being calculated here

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Nupur Mahajan
nupur1188@...
Hartford CT United States
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Original Message:
Sent: 02-07-2021 08:18 AM
From: NILADRI CHAKRABORTY
Subject: Please explain cost of debt

Q.  Some years ago the firm issued 10,000 bonds, each with a face value of $1,000 and paying an annual coupon rate of 9.2%. These bonds are now trading at $1,040 per bond. A coupon payment on these bonds was made yesterday and the bonds mature next year. • The firm has no other debt or preferred stock outstanding. The firm's corporate tax rate is 30%.

As per my calculation:

Cost of debt after tax = 92*0.70/1040 = 0.0619 = 6.19%

But in Wiley:

  

Price = $1040.00 = 92.00+1000 /(1+ cost of debt)       ( not understanding)

So, Cost of debt before tax = (1092/1040) - 1 = 5%

Therefore, After tax cost of debt = 5*(0.7) = 3.5%

Please explain, why we should recalculate the cost of debt in this way ? and why my calculation is wrong ?