FV 10.0 mil, N 10, PMT 525,000, PV 11.0 mil computes to a Rate (YTM) of 4.016% semi annually, or 8.03% APR. After tax cost of debt = 8.03 x 65%, or 5.22%
You need to use a spreadsheet or financial calculator to determine the YTM.
The relevant cash flows "CF":
CF0: (1.10 * 10m) = (11,000,000)
assuming semi-annual coupon pmts:
coupon: 10m * (0.105 / 2) = 525k
n = 20
CFs 1 - 19: 525k
CF 20: 10,525,000
semi-annual YTM: 4.48241
annualized YTM: 4.48241 * 2 = 8.96482%
After tax cost of debt: YTM * (1 - tx)
ATRd: 0.0896482 *0.65 = 0.05827, or 5.827%
SFE Inc. has 1 million shares of common stock outstanding at a book value of $40 per share. The stock trades for $50 per share. It also has $10 million in face value of debt (corporate bonds of 5 years with a coupon rate of 10.5%) that trades at 110% of face value. The company's equity beta is 1.2. The risk free rate is 4% and the market risk premium is 8%. The tax rate is 35%.
I am at a loss as to how to calculate the before-tax cost of debt (hinted as YTM of the bonds). Is there enough information here?
