Ying Import has several bond issues outstanding, each making semiannual interest
ID: 2652823 • 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 34 percent, what is the aftertax cost of Ying's debt? (Do not round your intermediate calculations.)
NOTE: YTM is given as a decimal, so 0.05 is 5%. Get the market values and then take a market value-weighted average of the YTM. Please note that bond prices are quoted as a percent of par value (or face value). So if you see a price of 98, that means the market value is 98% of the face value. Don't forget to adjust for tax once you have the weighted average YTM, and leave the YTM as an APR.
Bond
Coupon Rate
Price Quote
Maturity
Face Value
3.5%
5.52%
3.83%
3.46%
3.64%
Bond
Coupon Rate
Price Quote
Maturity
YTM (quoted as decimal, not %)Face Value
1 6.3% 108 5 years 0.045 $ 23,000,000 2 7.4% 117 9 years 0.0503 $41,000,000 3 6.4% 109 21 years 0.0566 $42,000,000 4 7.7% 123 33 years 0.0608 $62,000,000Explanation / Answer
Cost of Debt using YTM Approach
Cost of debt is also calculated using YTM approach.
YTM is nothing but the annual return from a bond purchased today and held till maturity. It is the rate at which current market price of the bond is equal to present value of all cash from the bond.
Current Market price= (present Value of Coupon payment) + (Present value of FV)
Current market price= Ct /(1+i)t + FV/(1+i)t
Where Ct = Coupon payment at t time
Thus calculated ‘i= YTM
In the given question YTM is given
Bond
Quote Price
FV
Market Value
Weight
YTM (Pre Tax)
YTM ( Post Tax ) YTM x 0.66
WACC (Weight x YTM Post Tax)
1
108
23,000,000
24,840,000
0.127
0.045
0.0297
0.0038
2
117
41,000,000
47,970,000
0.246
0.0503
0.0332
0.0082
3
109
42,000,000
45,780,000
0.235
0.0566
0.0374
0.0088
4
123
62,000,000
76,760,000
0.391
0.0608
0.0401
0.0157
194,850,000
1.00
0.0364
Answer= 3.64 %
Bond
Quote Price
FV
Market Value
Weight
YTM (Pre Tax)
YTM ( Post Tax ) YTM x 0.66
WACC (Weight x YTM Post Tax)
1
108
23,000,000
24,840,000
0.127
0.045
0.0297
0.0038
2
117
41,000,000
47,970,000
0.246
0.0503
0.0332
0.0082
3
109
42,000,000
45,780,000
0.235
0.0566
0.0374
0.0088
4
123
62,000,000
76,760,000
0.391
0.0608
0.0401
0.0157
194,850,000
1.00
0.0364
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