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 $27 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 $32 million, and the issue sells for 94% of par value. The firm's tax rate is 40%.

a. 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.)

b. 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.)

Explanation / Answer

To find the total cost we have to find market value of the

bonds

1.PV(9%,10,-80,1000,0)=935.82

Total bonds assuminh par value of 1000 =27*10^6

= 27*10^3*935.82 =25.26 Mn

2Now we have to find the yield of bind

Market value =.94*32 =30.08

Yield =9.78%

Before tax cost of debt =(30.08*9.78% +25.26*9%)/55.34

=9.42%

After cost of debt = 9.42%*(1-.4)=5.654%

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