Ying Import has several bond issues outstanding, each making semiannual interest
ID: 2718936 • 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 30 percent, what is the aftertax cost of Ying's debt? (Do not round your intermediate calculations.)
Bond
Coupon Rate
Price Quote
Maturity
Face Value
4.28%
4.11%
4.07%
6.12%
4.5%
Bond
Coupon Rate
Price Quote
Maturity
YTMFace Value
1 6.1% 102 8 years 5.78% $ 23,000,000 2 7.1% 108 11 years 6.09% $41,000,000 3 6% 100 26 years 6% $47,000,000 4 7.1% 111 38 years 6.33% $63,000,000Explanation / Answer
To find the after-tax cost of debt for the company, we need to find the weighted average of the four debt issues. We will begin by calculating the market value of each debt issue, which is:
MV1 = 1.02*($23,000,000)
MV1 = $23,460,000
MV2 = 1.08*($41,000,000)
MV2 = $44,280,000
MV3 = 1*($47,000,000)
MV3 = $47,000,000
MV4 = 1.11*($63,000,000)
MV4 = $69,930,000
So, the total market value of the company’s debt is:
MVD = $23,460,000 + 44,280,000 + 47,000,000 + 69,930,000
=184,670,000
The weight of each debt issue is:
w1 = $23,460,000/$184,670,000
w1 =0.12703
w2 = $44,280,000/$184,670,000
w2 =0.23978
w3 = $47,000,000/$184,670,000
w3 = 0.25451
w4 = $69,930,000/$184,670,000
w4 = 0.37868
The weighted average YTM of the company’s debt is thus:
YTM = 5.78%*(0.12703) + 6.09%*(0.23978) + 6%*(0.25451) + 6.33%*(0.37868)
YTM = 6.12%
And the aftertax cost of debt is:
RD = 6.12%*(1 – 0.30)
RD = 4.28%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.