You are analysing the cost of debt for a company. You know that the company's 14-year maturity, 8.5 per cent coupon bonds are selling at a price of $823.48. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the company, what is the after-tax cost of debt for this company if the corporate tax is 30 per cent?
Solution: The current YTM for the bonds can be calculated as follows.
$823.48 = $42.50 x PVIFA(28, YTM/2) + $1,000 x PVIF(28, YTM/2)
Solving, we find that YTM = 0.11, and therefore the after-tax cost of debt is equal to:
0.11 x (1 - 0.3) = 0.077, or 7.7%
According to the solution, the calculation of the current YTM for the bonds. Can you explain how to get those number?