Question

What numbers do I need to plug in to the calculator ?

1. What is the before-tax cost of debt? For FV, my professor used 1000, and i dont know where that number is from
2. What is the after-tax cost of debt?

Debt	100,000 bonds with an 15.0% coupon rate, payable semiannually, 15 years to maturity, selling at $1,300 per bond.
Common Stock	1,500,000 shares of common stock outstanding. The stock sells for a price of $70 per share and has a beta of 1.6
Preferred Stock	200,000 preferred shares outstanding, currently trading at $120 per share; with an annual dividend payment of $8.50
Market	The market risk premium is 10% and the risk-free rate is 2%
Tax Rate	35%

Answer 1

The future value of the bond is $1,000 since the par value of a bond is $1,000 and the par value is taken as the future value.

Information provided:

Par value= future value= $1,000

Time= 15 years*2= 30 semi-annual periods

Coupon rate=15%/2= 7.50%

Coupon payment= 0.075*1,000= $75

Current price= present value= $1,300

The before tax cost of debt is calculated by computing the yield to maturity.

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,300

N= 30

PMT= 75

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 5.4477.

Therefore, the before tax cost of debt is 5.4477%*2= 10.8955% 10.90%.

After tax cost of debt= Before tax cost of debt*(1 - tax rate)

= 10.90%*(1 - 0.35)

= 7.0850% 7.09%.