Russell Container Corporation has a $1,000 par value bond outstanding with 15 ye
ID: 2739191 • Letter: R
Question
Russell Container Corporation has a $1,000 par value bond outstanding with 15 years to maturity. The bond carries an annual interest payment of $109 and is currently selling for $940 per bond. Russell Corp. is in a 35 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar.
a. Compute the yield to maturity on the old issue and use this as the yield for the new issue. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Yield to maturity ______%
b. Make the appropriate tax adjustment to determine the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Aftertax cost of debt _____%
Explanation / Answer
Answer to Part a
Y’ = [Annual Interest Payment + (Principal Payment-Price of the Bond)/ No of years to maturity]
/[0.60 (Price of the bond) + 0.40 (Principal Payment)]
= [109 +(1000-940)/15] / [(0.60*940) + (0.40*1000)]
= [109+ 4]/[564+400]
= 113/964 = 11.72
Answer to part b
Kd= Yield (1 – T)=
= 11.72% (1 – 0.35)
= 11.72% (0.65)
= 7.62%
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