In part b. how do I arrive at 44.75? for the PMT in this solved equation? 1. Con
ID: 1172469 • Letter: I
Question
In part b. how do I arrive at 44.75? for the PMT in this solved equation?
1. Consider the after-tax cash flows below from a project that is being considered by Despondus Corporation. Since the project is an extension of the firm's current business, it carries the same risk as the overall firm Year 0 4 Cash Flow-S344,000 $86,000 S67,000 0,000S97,000 Despondus Corporation's common stock is currently priced at $80.03, and there are 856,000,000 shares outstanding. A dividend of S3.29 per share was just paid, and dividends are expected to grow at a constant rate of 7.49% per year. The company has 6,460,000 bonds outstanding that mature in 23 years and are currently priced at $1,072 per bond. The coupon rate is 8.95%, and the bonds make semiannual interest payments. The company's tax rate is 39% a. What is Despondus Corporation's after-tax cost of equity? 11 .91 %-($3.29 x 1.0749) / $80.03 + 0.0749 b. What is Despondus Corporation's after-tax cost of debt? 5.03%-8.246597% x (1-0.39) N 46 PV--1072 PMT 44.75 FV 1000 CPT 1% = 4.123299 × 2 = 8.246597%Explanation / Answer
'PMT' is the basically the coupon on the bond.
The bond in question is actually a semi-annual coupon paying bond. By semi-annual, it means that the coupon payments will be made in every 6 months. Since the coupon payments are made every 6 months, accordingly the compounding would take place on a semi-annual basis.
The Annual coupon rate showed by bond = 8.95% * Face Value = 8.95% * $1,000 = $89.5
This is the annual coupon, so on half yearly basis coupon paid would be $89.5/2 = $44.75 --> This goes as input in Excel/Financial Calculator as 'PMT'.
Remember since the bond is semi-annual, PMT = Annual Coupon/2, i/Y = Annual Yield/2, n = Number of Years to Maturity * 2.
{If the bond was quarterly coupon paying bond, PMT = Annual Coupon/4, i/Y = Annual Yield/4, n = Number of years to maturity * 4 since there are 4 quarters in ayear and there would have been quarterly compounding. }