2 Ying Import has several bond issues outstanding, each making semiannual intere
ID: 2657804 • Letter: 2
Question
2 Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below Maturity 4 years T years 145 years 24 years Bond Coupon Rate Price Quote 8.80% 7.00 8.50 9.00 105.8 94.6 104.6 106.5 Face Value $28,000,000 48,000,000 53,000,000 68,000,000 If the corporate tax rate is 40 percent, what is the aftertax cost of the company's debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g 32.16.) Aftertax cost of debtExplanation / Answer
To find the aftertax cost of equity for the company, we need to find the weighted average of the four debt issues.
For that let us calculate market value of each bond first:-
= (Price * Face value)/100
B1 = (105.8 * 28,000,000)100
= 2,96,24,000
B2 = (94.6*48,000,000)/100
= 4,54,08,000
B3 = (104.6*53,000,000)/100
= 5,54,38,000
B4 = (106.5*68,000,000)/100
= 7,24,20,000
So, total market value = B1 + B2 + B3 + B4
= 202,890,000
So, weight of each bond:-
B1 = 2,96,24,000/202,890,000
= 14.60%
Same way,
B2 = 22.38% (4,54,08,000/202,890,000)
B3 = 27.32% (5,54,38,000/202,890,000)
B4 = 35.69% (7,24,20,000/202,890,000)
Now, we need to find the Yeild To Maturity for each bond It is:-
P1 = Interest (PVIFA, n) + FV (PVIF, n)
Y1 = $1,058 = $44 (PVIFA,8) + $1,000(PVIF,8)
So, R = 7.11%
Y2 = 946 = 35 (PVIFA, 14) + 1000 (PVIF, 14)
So, R = 8.02%
Y3 = 1046 = 42.5 (PVIFA, 29) + 1000 (PVIF, 29)
So, R = 7.96%
Y4 = 1065 = 45 (PVIFA, 48) + 1000 (PVIF, 48)
So, R = 8.37%
Now,
Cost of debt = B1*Y1 + B2*Y2 + B3*Y3 + B4*Y4
= (14.6%*7.11%)+(22.38%*8.02%)+(27.32%*7.96%)+(35.69%*8.37%)
= 1.04 + 1.79 + 2.17 + 2.99
= 7.99%
So, after tax cost of debt = 7.99 (1-t)
= 7.99 (1-0.40)
= 7.99(0.60)
= 4.79% (approx.)
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