Concept explainers
YTM is the yield to maturity. It is the rate earned by the investor if he holds the bond till maturity.
Calculate the YTM by using the following formula:
Where,
M is the par value or face value,
INT is the dollar interest payment,
N is the number of years of interest payment.
After tax cost of debt: Interest expenses are tax deductible. So, after tax cost of debt is obtained after deducting the tax expenses from the cost of debt.
Calculate the after tax cost of debt by using the following formula:
T is the tax rate,
G products is plan to issue new bonds for new growth opportunity. Interest payment is $60, maturity 10 years, current price is $1,077 and tax rate is 40%
Explanation of Solution
a.
Calculate the YTM as follows:
Using Excel calculate YTM:
Therefore, the YTM is
a.
Calculate the after tax cost of debt as follows:
Therefore, the after tax cost of debt is
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