Answer:
The before-tax component cost of debt is 8.489%.
Explanation:
We apply the formula for yield to maturity (YTM) to solve this problem.
YTM = [C + (F-P)/n] / [(F+P)/2] where
C = Coupon payment
F = Face value of bond
P = Present value of bond (or current selling price)
n = Years to maturity
The given values are:
F = $15,000,000
P = 0.99 x $15,000,000 = $14,850,000
C = 0.0835 x $15,000,000 = $1,252,000
n = 10
Applying these values in the above formula,
YTM = [1,252,000 + (15,000,000 - 14,850,000)/10]
      / [(15,000,000 + 14,850,000)/2]
YTM = 1,267,000 / 14,925,000
YTM = 0.08489
YTM = 8.489%
Answer: The answer is 8.49%
Explanation:
Using the formula
YTM = C + ( F + P) / n / (F + P ) / 2
Where C= annual coupon amount
F = Face value of the bond
P = Current bond price
n = Total number of years till maturity
F = 15,000,000
P = 0.99 × 15,000,000 = 14,850,000
C = 0.835 × 15,000,000 = 1,252,500
n = 10
Putting the value into the above formula we have
1,252,500 + ( 15,000,000 - 14,850,000) / 10 / (15,000,000 + 14,850,000) / 2
= 1,267,500/ 14,925,000
= 0.0849 × 100
= 8.49%
Therefore before tax component cost of debt is 8.49%
