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Hello sir
When calculating the yield of maturity of the new bonds, the answer uses the post-tax interest.
Why can not use the pre-tax interest to calculate this ? (As calculating the value of the bonds used pre-tax interest)
Thank youThe calculation is the cost of debt to the company and is not the yield to maturity (and it is the cost of debt that is needed for the calculation of the WACC).
I contacted the examiner about this and he confirms that the workings are headed up wrongly and that it is therefore confusing.
The yield to maturity is the return to investors and is the IRR of the pre-tax flows. But that is not required here.
So the calculations are all correct, it is just that the heading to the workings should not be ‘yield to maturity’, but should be ‘cost of debt’.
@Hagun527 Thank you for asking the question as I was confused as well. I hope it’s not like this in real exam.
Thank you John for clariying.
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