1.The following information has been extracted from the financial statements of

Question

1.The following information has been extracted from the financial statements of RMK International Limited for the year ended 31 December 2001:
Equity shares of $1 each : $1,000,000
8% Preference shares of $1 each : $ 400,000
12% Redeemable Debentures of $100 each : $ 300,000
The current market value of an equity share is $1.30 before paying the equity dividend.
The market value of the redeemable debenture (which is redeemable at 10% premium in 2 years) is $108 per debenture.
The preference share’s current market value is $0.60 per share.
The rate of growth of this company is expected to be 8% every year and the current year equity dividend will be $100,000 which is due to be paid.
The preference dividend and debenture interest have been already paid. The corporate tax will be 26%.
i still not sure how to calculate the Cost of Debt (Redeemable Debentures).
How to calculate cost of debt?

Explanation / Answer

cost of debt =kd(1- tax )
= 7.542(1-.26) = 5.58%
Yield to maturity =
c/(1 + r)^1 + c/(1 + r)^2 + .......(1 + r)^Y + B/(1 + r)^Y = P
    where
c = annual coupon payment (in dollars, not a percent)
Y = number of years to maturity
B = par value
P = market value
$108 = 12/(1+ r)^1 + 12/(1+r)^2 + 100/(1+r)^2
r = 7.542% = kd

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