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FIN 370 Finance Lab Week 2 – Step by Step Answers

By Andy Nakatomi

The week 2 finance lab in FIN 370 presents a huge challenge to many students. Going from very little finance knowledge to solving complex cost of capital problems is a lot to ask an online student. Fortunately, these problems can be solved much easier if you take them step-by-step.  Let’s break the process down for each step.

The Problem

“A bond that has a $ 1,000 par value (face value) and a contract or coupon interest rate of 10.5%. The bonds have a current market value of$ 1,124 and will mature in 10 years. The firm's marginal tax rate is 34%.” What is the cost of debt?

Step 1 – The Cost of Capital Formula

It really helps if you have a solid understanding of bonds when you solve this problem. The basic formula can be expressed like this:

Cost of Capital =  Yield to maturity (YTM) * (1-Marginal Tax Rate)

Step 2 – Finding the Yield to Maturity YTM

We can find the YTM by using the following formula:

YTM = (Annual interest+ (Par-Price of Bond )/Number of years until bond maturity )/(Bond par value + market price)/2

You can check your work using a YTM calculator. We really like this YTM calculator provided by Investopedia. Its best to work out the formula first, then check your work using the calculator.

Step 3 – Solve It

Use the order of operations to solve the equation. It helps to have a good finance or graphing calculator, but that is not completely necessary.

Cost of Debt = 0.0860*(1-0.34)= 0.0567 or 5.67%

Cost of Debt = 5.67%

That’s it, you’ve solved it in 3 easy steps.

FIN 370 Answer Presentation for Week 2

Sometimes it is easier to under standing the process of solving financial problems with a visual aid. Below you will find a presentation that will walk you through the process visually.


Maybe a Video will Help?

These concepts take a lot of practice to master. Here is a quick video that will provide even more tips to help you get a grip on week 2 finance lab solutions.



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