Cost of Debt - Correct Formula to use
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