Ying Import has several bond issues outstanding, each making semiannual interest

Question

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below.

Required:

If the corporate tax rate is 40 percent, what is the aftertax cost of the company’s debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Bond Coupon Rate Price Quote Maturity Face Value 1    8.80% 105.8 4 years $28,000,000 2 7.00 94.6 7 years 48,000,000 3 8.50   104.6     14.5 years     53,000,000 4 9.00 106.5 24 years 68,000,000

Explanation / Answer

Answer:

Next, we need to find the YTM for each bond issue. The YTM for each issue is:

P 1 = $1058 = $44(PVIFA R%,8 ) + $1,000(PVIF R%,8 )

R 1 = 3.55%

YTM 1 = 3.55%*2

YTM 1 = 7.1%

P 2 = $946 = $35(PVIFA R%,14 ) + $1,000(PVIF R%,14 )

R 2 = 4.01%

YTM 2 = 4.01% 2

YTM 2 = 8.02%

P 3 = $1046 = $42.5(PVIFA R%,29 ) + $1,000(PVIF R%,29 )

R 3 = 3.98%

YTM 3 = 3.98%* 2

YTM 3 =7.96%

P 4 = $1,065 = $45(PVIFA R%,48 ) + $1,000(PVIF R%,48 )

R 4 = 4.18%

YTM 4 =4.18%*2

YTM 4 = 8.36%

The weighted average YTM of the company's debt is thus:

And the aftertax cost of debt is: R D = 7.99%(1 - .40)

=4.794%

Bond Face value (A) Price Quote (B) Market value (C=A*B) Weight 1 28,000,000 1.058 29624000 0.146010153 2 48,000,000 0.946 45408000 0.223806003 3 53,000,000 1.046 55438000 0.273241658 4 68,000,000 1.065 72420000 0.356942185 Total 202890000 1

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