Answer:
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%
