The question is "What is the cost of Debt"

I have reached a solution based off the book that is

Cost of Debt = (I + (M-NP)/n) / (M + NP) / 2

I = Dollar Return
M = Maturity Value
NP = Net Proceeds of issue
n = years

This is an approximation to finding the cost.

However, another book states it slightly different:

Cost of Debt = ( I (1-t) +(RV-SV) /n) / (RV+SV) /2

RV = Realisable value (ie they used $104 as this is the current price, not the maturity value)
SV = same as NP above

As you can see there is a slight difference to the final answer I would receive due to RV and M.

I guess which one is correct?? Not after an answer, that's why I have left out some of the figures, but looking for a solution to which variable to use. Is it RV or M??

Thanks
Macca

The two equations are actually correct one is Cost of debt before tax and the second is after-tax cost of debt. It depends on what you are looking for. Most equations use the later of the two which is the after-tax cost of debt.

Can anyone tell me in which book that cost of debt formula is stated.. so I can show it to my faculty...