2 years ago Mickey\'s Mouse Emporium issued a bond with 10 years to maturity. Th

Question

2 years ago Mickey's Mouse Emporium issued a bond with 10 years to maturity. The bond pays an annual coupon of 6 percent. The bond currently sells for 95 percent of its face value and has a yield to maturity of 6.82%. The company’s tax rate is 40 percent. The book value of the debt issue is $55 million. 2 55000000 In addition, Mickey's Mouse Emporium issued a zero coupon bond that yields 4.03% with 15 years left to maturity; the book value of this bond issue is $30 million, and the bonds sell for 55 percent of par.

What is the company's (after-tax) cost of debt based on the debts' market value? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of debt %=?

Explanation / Answer

After tax cost of debt = 3.69%

After tax Yield market value market value weights After tax yield * market value wieghts 10 year Bond 6.82 [1-.40] = 4.092 55,000,000*.95 = 52250000 52250000/68750000= .76 or 76% 4.092*.76 = 3.11 Zero coupon bond 4.03[1-.40] = 2.418 30,000,000*.55= 16500000 16500000/68750000= .24 or 24% 2.418*.24= .58 68,750,000 After tax cost of debt 3.69

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