Corporate Finance Practice Problem

CFA Level I Corporate Finance
#1

Hi All,

I’m currently busy with the preparations of the exam for Level 1.

There seems to be a practice problem I can’t understand. It is the practice problem nr 4 of Reading 35 - Cost of Capital.

I can’t figure out how to use the calculator for this. I keep receiving the Error 5 or Error 7 when using the BA 2 Plus Texas Instruments.

Would there be someone that can help me out here?

Thanks.

#2

I don’t have L1 materials, but you can show me how you keyed in the numbers.

#3

The question is as follows;

Company X has determined that it could issue $1000,- face value of bonds with an 8 % coupon paid semi annually and a five year maturity at $900 per bond. The marginal tax rate of the company is 38%. What is its after tax cost of debt?

So in my calculator (which is set on END)I do the following FV 1000 PMT 40 N 10 PV 900 CPT I/Y

I get then the error 5

If I do the same as above, however with -40 PMT I get the error 7.

So not sure what I am doing wrong here.

Thanks.

#4

Set PV as negative. PV is the outflow and PMT and FV are inflows. You’ll get a value then.

#5

Yes that did the trick.

Thanks for the help!