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I cannot see what interest was applied, I had 6.30 (9 less tax), I have different answer but have used different discount rates.?
It specifically says ignore taxation (but I’ll explain including it so that you’ll be able to do it if it comes up).
To figure out the actual cost of debt you need to find the discount rate at which the PV of the future cash flows is equal to the current market value.
So what you have is an annuity with the length equal to time to maturity and CF equal to the interest payment (after tax if the tax rate is given because it’s cost to the firm not return to the investor that we are looking for).
And a final payment equal to the redemption value.
Now using PV and Annuity Factors and trial and error you find the rate where the PV of the cash flows is equivalent to Market Value. In this case without tax I’d start at the coupon rate. 9% gives you a PV higher than the market value therefore you need to choose a higher value for your next guess. Sometimes you’ll get the actual cost in this manner – but in the problem you mentioned they’ve used the IRR equation to interpolate between a negative and positive PV.
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