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sir if a companies only debt was 10,000, 20-year bonds issued at a price of $870 with a
coupon rate of 5%, how will we calculate KD and MV of debt? like for KD we will use formula for redeemable debt right? secondly if its issued at $870 thats the face value right? hence interest will be 5% of $870?One more thing sir that i this question retained earning figure is given of one yr and the project is a new developmental project , what is the significance of retained earning figure? are we supposed to use cost retained earnings figure in WACC?
There is no formula for calculating the cost of redeemable debt – you need to calculate the IRR.
To calculate the cost of debt you need to know the market value. To calculate the market value you need to know the investors required rate of return (which is equal to the cost of debt if there is no tax).
The question as you have typed it is impossible because there is not enough information.Retained earnings are not relevant when calculating the WACC because we use the market value of equity.
I do suggest that you watch my free lectures on all of this. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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