Ying Import has several bond issues outstanding, each making semiannual interest
ID: 2759371 • 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 34 percent, what is the aftertax cost of Ying's debt? (Do not round your intermediate calculations.)
Bond
Coupon Rate
Price Quote
Maturity
Face Value
25 years
$65,000,000
Bond
Coupon Rate
Price Quote
Maturity
Face Value
1 6.0% 103.18 5 years $ 45,000,000 2 7.50% 110.50 8 years $40,000,000 3 7.20% 109.85 15.5 years $50,000,000 4 6.80% 102.7525 years
$65,000,000
Explanation / 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 and the weight of each debt issue
Next, we need to find the YTM for each bond issue. The YTM for each issue is
P1 => $1031.80 = $30(PVIFAR%,10) + $1000(PVIFR%,10)
R1=> 2.64%
YTM 1=> 2.64 *2 => 5.28%
P2 => $1105 = $37.50(PVIFAR%,16) + $1,000(PVIFR%,16)
R2 => 2.94%
YTM 2 => 2.94*2 => 5.88%
P3 => $1098.50 = $36(PVIFAR%,31) + $1,000(PVIFR%,31)
R3 => 3.13%
YTM 3=> 3.13 *2 => 6.26%
P4 => $1027.50 = $34(PVIFAR%,50) + $1,000(PVIFR%,50)
R4=> 3.30%
YTM 4=> 6.6%
The weighted average YTM of the company’s debt is thus
YTM => 0.2187*(0.0528) + 0.2082 *(0.0588) +0.2587*(0.0626)+0.3145*(0.066)
YTM => 0.0607 or 6.07%
And the aftertax cost of debt is:
Rd => 6.07% - 34%
=> 4.00
Cost of Debt => 4%
Bond Price Quote(a) Face Value(b) MArket Value(c) = (a)*(b) Weight=> (c)/212343500 1 1.0318 45000000 46431000 21.87% 2 1.1050 40000000 44200000 20.82% 3 1.0985 50000000 54925000 25.87% 4 1.0275 65000000 66787500 31.45% TOTAL 212343500Related Questions
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