Olympic Sports has two issues of debt outstanding. One is a 8% coupon bond with

Question

Olympic Sports has two issues of debt outstanding. One is a 8% coupon bond with a face value of $31 million, a maturity of 10 years, and a yield to maturity of 9% The coupons are paid annually. The other bond issue has a maturity of 15 years, with coupons also paid annually, and a coupon rate of 9%. The face value of the issue is $36 million, and the issue sells for 93% of par value The firm's tax rate is 35%. What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Before-tax cost of debt What is Olympic's after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) After-tax cost of debt

Explanation / Answer

Bond 1 Year Coupon +Maturity Discount factor @9% PV of cash Flow 1                      2,480,000                        0.9174         2,275,229 2                      2,480,000                        0.8417         2,087,366 3                      2,480,000                        0.7722         1,915,015 4                      2,480,000                        0.7084         1,756,895 5                      2,480,000                        0.6499         1,611,830 6                      2,480,000                        0.5963         1,478,743 7                      2,480,000                        0.5470         1,356,645 8                      2,480,000                        0.5019         1,244,628 9                      2,480,000                        0.4604         1,141,861 10                   33,480,000                        0.4224       14,142,314 Total       29,010,526 Current Bond Price = $           29,010,526 Bond 2 Face value                36,000,000 Current value                33,480,000 Years to maturity                                15 Coupon payment @9%                  3,240,000 YTM = [Annual interest +(Face value-market price)]/(Face value +2*market price)/3             =[3240000 +(36000000-33480000)/15]/(36000000+33480000*2)/3                = 3408000/34320000                 =9.93% So YTM of bond 2= 9.93% Debts Market value % value Cost Bond 1                29,010,526 46.42% 9.00% Bond 2                33,480,000 53.58% 9.93%                62,490,526 Weighted cost of debt =0.4642*0.09+0.5358*0.0993                                   = 9.50% a So Pretax cost of debt =9.5% Post Tax cost =9.5(1-0.35)=6.175% b So Post tax cost =6.175%

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