edupristine wrote:Cost of debt, can be calculated by two step approach:
1) We calculate annual yield to maturity for investor, which by
Equating Present value, i.e. 1000*97% with the semi-annual payments, we get annual yield maturity i.e. 10.592% (APR)
2) Now, from company’s point of view this cost shall be calculated considering the fact that they can deduct interest from taxable income.
Given the tax rate of 35%, we get , Cost of debt is given by, 10.592%*(1-.35)= 6.88%
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