Finance - Cost of Debt

[dr|ft]

I didn't think these 2 questions applied to the other sub-forums so i put them in here.

 

So Rd = [ I + (PV-NP)/n] / [(PV+NP)/2]

 

where Rd = cost of debt

I = annual interest payment

PV = par (or face) value of the debenture

NP = net proceeds of the issue = market price less costs

n = the number of years to maturity of the debenture

 

Eg the book gives me is...

Suppose the Russ Saving Company issued an eight-year, 7 per cent debenture two years ago. The debenture is currently selling for $95.38. What is Russ Saving's cost of debt?

 

Rd = [7 + (100-95.38)/6] / [(100+95.38)/2]

= 7.95%

 

If we assume a corporate tax rate of 30 per cent this approximate rate is adjusted for tax as follows -

7.95% x (1-0.3) = 5.565%

 

OK that is straight from the text also "The cost of debt is the return that the firm's debtholder demand on new borrowing" if u were wondering.

 

 

Find the cost of debt capital for Danny's Dangerous Didgeridoos if they issued corporate bonds with a face value of $1,000, paying interest at 5.25% pa compounded semi-annually, with a maturity of exactly 6 years. The current price is $1,000. The corporate tax rate is 36%. You may give your answer as an after-tax percentage per annum to the nearest percent or use linear interpolation or a financial calculator to give a more accurate result. Your answer should remain compounded semi-annually.

Cost of debt = % pa

 

 

A $1,000 corporate bond, issued by Ellie's Elegant Eveningwear, paying half-yearly compounding interest at 5.25% matures on 24 July 2013. If this corporate bond is worth $1,030.68 on 24 July 2006, what is the cost of debt, compounded semi-annually, for Ellie's Elegant Eveningwear? The corporate tax rate is 38%. You may give your answer as an after-tax percentage per annum to the nearest percent or use linear interpolation or a financial calculator to give a more accurate result.

Cost of debt = % pa

 

If you guys could give me a hand that would be awesome, thanks.

[dr|ft]

for the first one would it be

PV=1000

NP=1000

n=6

I=5.3189% pa (the pa value of 5.25% compounding semi-anually)

 

making the first question

 

Rd = [5.3189+ (1000 -1000)/6] / [(1000+1000)/2]

= 0.53189%

 

0.53189% x (1-0.36) = 0.3404096%