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.)

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%

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%