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12 February, 20:18

Oberon, Inc., has a $15 million (face value) 10-year bond issue selling for 99 percent of par that pays an annual coupon of 8.35 percent. What would be Oberon's before-tax component cost of debt? (Round your answer to 2 decimal places.)

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  1. 12 February, 21:22
    0
    Answer: The answer is 8.49%

    Explanation:

    Using the formula

    YTM = C + (F + P) / n / (F + P) / 2

    Where C = annual coupon amount

    F = Face value of the bond

    P = Current bond price

    n = Total number of years till maturity

    F = 15,000,000

    P = 0.99 * 15,000,000 = 14,850,000

    C = 0.835 * 15,000,000 = 1,252,500

    n = 10

    Putting the value into the above formula we have

    1,252,500 + (15,000,000 - 14,850,000) / 10 / (15,000,000 + 14,850,000) / 2

    = 1,267,500 / 14,925,000

    = 0.0849 * 100

    = 8.49%

    Therefore before tax component cost of debt is 8.49%
  2. 13 February, 00:06
    0
    The before-tax component cost of debt is 8.489%.

    Explanation:

    We apply the formula for yield to maturity (YTM) to solve this problem.

    YTM = [C + (F-P) / n] / [ (F+P) / 2] where

    C = Coupon payment

    F = Face value of bond

    P = Present value of bond (or current selling price)

    n = Years to maturity

    The given values are:

    F = $15,000,000

    P = 0.99 x $15,000,000 = $14,850,000

    C = 0.0835 x $15,000,000 = $1,252,000

    n = 10

    Applying these values in the above formula,

    YTM = [1,252,000 + (15,000,000 - 14,850,000) / 10]

    / [ (15,000,000 + 14,850,000) / 2]

    YTM = 1,267,000 / 14,925,000

    YTM = 0.08489

    YTM = 8.489%
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