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Henry has 12% irredeemable bonds in issue with a nominal value of $100.The market price is $95 ex div interest.Calculate the cost of capital if interest is paid half yearly.pls help
(Pg 297 bpp text)
I do not have a BPP text, and because you have not mentioned tax I have to assume that there is none.
In which case, the half yearly cost of debt is 6/95 = 6.32%
So the yearly cost of debt is: 1.0632^2 – 1 = 0.1304 or 13.04%
However, tax relief would make it lower. Also, this is only the cost of debt – for cost of capital we would also need to know the cost of equity.
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