Ying Import has several bond issues outstanding, each making semiannual interest
ID: 2383536 • Letter: Y
Question
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table.
If the corporate tax rate is 35 percent, what is the aftertax cost of the company’s debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Bond Coupon Rate Price Quote Maturity Face Value 1 6.1 % 105.96 5 years $ 41,000,000 2 7.6 114.62 8 years 36,000,000 3 7.3 113.17 15.5 years 56,000,000 4 6.9 102.41 25 years 51,000,000Explanation / Answer
Formula : Post Tax cost of Debt
k= [ C(1-T)+ (P-F)/n] / (P+F)/2
Where , k = cost of debt
T = Corporate Tax rate = 35%
C = annual interest payable
F= redemption price =$100 assumed
N= maturity of debt
T =
35%
Bond no
C
P
n
F
k calculation
k result
Face value
Weight
Weighted cost of debt
1
6.1
105.96
5
100
= [6.1*0.65+6/5]/(206/2)
5%
41,000,000
0.223
0.01
2
7.6
114.62
8
100
=[7.6*0.65+14.6/8]/(214.6/2)
6.3
36,000,000
0.196
1.23
3
7.3
113.17
15.5
100
=[7.3*0.65+13.2/15.5](213.2/2)
5.24
56,000,000
0.304
1.59
4
6.9
102.41
25
100
=[6.9*0.65+2.4/25]/(202.4/2)
4.52
51,000,000
0.277
1.25
Total
184,000,000
4.09
So the post tax weighted cost of debt is 4.09%
T =
35%
Bond no
C
P
n
F
k calculation
k result
Face value
Weight
Weighted cost of debt
1
6.1
105.96
5
100
= [6.1*0.65+6/5]/(206/2)
5%
41,000,000
0.223
0.01
2
7.6
114.62
8
100
=[7.6*0.65+14.6/8]/(214.6/2)
6.3
36,000,000
0.196
1.23
3
7.3
113.17
15.5
100
=[7.3*0.65+13.2/15.5](213.2/2)
5.24
56,000,000
0.304
1.59
4
6.9
102.41
25
100
=[6.9*0.65+2.4/25]/(202.4/2)
4.52
51,000,000
0.277
1.25
Total
184,000,000
4.09
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