Problem 11-10 Approximate yield to maturity and cost of debt [LO3] Russell Conta

Question

Problem 11-10 Approximate yield to maturity and cost of debt [LO3] Russell Container Corporation has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $105 and is currently selling for $880 per bond. Russell Corp. is in a 40 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar a. Compute the yield to maturity on the old issue and use this as the yield for the new issue. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) b. Make the appropriate tax adjustment to determine the aftertax cost of debt.(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Input variables: Settlement date Maturity date Coupon rate 1/1/00 1/1/30 0.105 Input as a decimal Y is yield Kd-Y(1-T) Bond price(% of par) Face value (% of par) Coupons per year Tax rate Tis coporate tax rate Percent of par Percent of par 88.000 100 1 (1 annual, 2 semiannual) 0.40 Solution and Explanation: Bond yield b. Aftertax cost of debt

Explanation / Answer

a). Calculator Solution:

Answer: 11.99% The yield to maturity

b). Kd = Yield(1 - T)

= 11.99%(1 - 0.4)

= 11.99%(0.6)

= 7.19%

N I/Y PV PMT FV 30 CPT I/Y 11.99 -880 105 1000

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