Hi Nupur,
The question ask for only first year of cost of debt,so in that case don't use yield to maturity(ytm) formula.YTM can be used to find the cost of debt when it become mature.
So in this case the cost for the company on first year is only interest and divide it with issue price and deduct the tax.
Hope this helps.
Regards.
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Prajnya Shetty
GL Executive in XPO Logistics
India.
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Original Message:
Sent: 02-26-2021 12:36 PM
From: Nupur Mahajan
Subject: Super confused - Concept of Cost of debt
So below is the question:
Maylar Corporation has sold $50 million of $1,000 par value, 12% coupon bonds. The bonds were sold at a discount and the corporation received $985 per bond. If the corporate tax rate is 40%, the after-tax cost of these bonds for the first year (rounded to the nearest hundredth percent) is:
How i solved it was by YTM method:
((120+1000)/985)-1= 13.71%*(1-t) = 8.226%
How Hock has solved it is:
120/985=12.18*(1-t) = 7.31%
No i am super confused how to differentiate what to calculate when. I have seen other posts asking questions on similar lines.
really looking forward to a clarification
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Nupur Mahajan
<maskemail>nupur1188@...</maskemail>
Hartford CT United States
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