Question

oberon, Inc, has a 40 million (face value) 8-year bond issue for 99 percent of par that pays an annual coupon of 8.40 percent. What would be oberon's before tax component cost of debt? (round answer to 2 decimal places).

Answer 1

Yield To Maturity(YTM) = (interest per period+ ((Redemption price - Current market price) / life remaining to maturity)) / ((.4*Redemption price)+ (.6*Current market price))

= ((40 million*8.4%)+((40 million-40 million*.99)/8)) / (.4*40 million+.6*40 million*.99))

= ((40 million*8.4%)+((40 million-39.6 million)/8)) / (.4*40 million+.6*39.6 million))

= (3.36 million + .05 million) / 39.76 million

= 3.41 million/39.76 million

before tax component cost of debt = 8.58%