Question

Oberon, Inc. has a $20 million (face value) 10-year bond issue selling for 97 percent of par that pays an annual coupon of 8.25 percent. What would be Oberon’s before-tax component cost of debt? (Round your answer to 2 decimal places.)

Answer 1

Information provided:

Face value= future value= $20 million

Current price= present value= 0.97*$20 million= $19.40 million

Time= 10 years

Coupon rate= 8.25%

Coupon payment= 0.0825*$20 million= 1.65 million

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

Enter the below in a financial calculator to compute the yield to maturity:

FV= 20

PV= -19.40

N= 10

PMT= 1.65

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

The value obtained is 8.71.

Therefore, the before tax component of debt is 8.71%.

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