3. Ying Import has several bond issues outstanding, each making semiannual inter
ID: 2653735 • Letter: 3
Question
3.
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?
Bond
Coupon Rate
Price Quote
Maturity
Face Value
1
6.25%
107.85
5 years
40,000,000.00
2
4.25%
112.38
4 years
50,000,000.00
3
5.00%
98.78
12 years
100,000,000.00
Select one:
a. 4.01%
b. 3.91%
c. 3.76%
d. 3.13%
e. 4.19%
Bond
Coupon Rate
Price Quote
Maturity
Face Value
1
6.25%
107.85
5 years
40,000,000.00
2
4.25%
112.38
4 years
50,000,000.00
3
5.00%
98.78
12 years
100,000,000.00
Explanation / Answer
As per financial calculator
YTM for bond 1 = 4.48%
YTM for bond 2 = 1.08%
YTM for bond 3 = 5.14%
Weighted YTM = (YTM for bond 1 * face value for bond 1 + YTM for bond 2 * face value for bond 2 + YTM for bond 3 * face value for bond 3) / Total face value
= (4.48% * 40,000,000 +1.08% * 50,000,000 + 5.14% * 100,000,000) / 190,000,000
= 4.72%
Now after tax cost of debt = Weighted YTM * (1 - tax rate)
= 4.72% * (1 - 34%)
= 3.13% which is option (d)
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