Bond A 10 year bond 9% paid semi-annually issued 2008 $1,000,000
Bond B 15 year bond 6% paid semi-annually issued 2010 $4,000,000
Bond C 3 year bond 5% paid semi-annually issued 2012 $1,000,000
Total bonds issued and outstanding $6,000,000
Common Equity
Common Shares $200,000
Contributed Surplus $1,800,000
Retained Earnings $2,000,000
Total Equity $4,000,000

You observe that 30 day Government T-bills are selling to yield 0.2432445% or 3% per year and the market risk premium for the firm is 10%. The average beta for the firm is 1.4. The firm has a marginal tax rate of 40%. The company shares are currently selling in the market for $56.55 and the firm just paid its most recent dividend of $8.00. Management expects to be able to sustain a growth rate of 2.5% forever.
a. Based on the above information, calculate the cost of borrowing using debt for the current company.

What am i missing here guys to solve A, i dont want the answer , am i missing some formula i dont know about, , i cant do YTM approx and then interpolation , its easy to calculate the cost of equity but how to calculate debt, i feel i am missing something obvious
gawd if they just gave bond quotes i could use YTM.. but they dont. Im at a stand still! Need this to calculate WACC so i cant move on.. ARG ,

This post was edited by wesley123 on Oct 9 2013 06:57pm

Can always dish out some fg, just want to know HOW im supposed to calculate the cost of borrowing using debt, i dont even want the answer!

Can't you just take the average interest rate paid on the bonds, then adjust for the tax benefits on interest payments?

1/6 x 1
4/6 x 4
1/6 x 1
=6,333%

cost of borrowing: 6,333% x (1-0,4) = 3,8%

?

This post was edited by Simens on Oct 10 2013 02:05am

I am not sure to be honest, I thought you would need bond quotes for each one, then find the YTM approx then use linear interpolation for each one to find r then you could take an average. You could be right and that could be the simple something i am missing.

I guess these bonds were sold at par

This post was edited by wesley123 on Oct 10 2013 09:34am

dont you just calculate the wacc, re, you're given e,d and v and just solve for the rd?

edit: could be wrong here its been a long time...

This post was edited by madeinchinars on Oct 11 2013 02:22am