Russell Container Corporation has a $1,000 par value bond outstanding with 15 ye

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 $117 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

1 Face value (FV) $                                   1,000.00 2 Coupon rate 11.70% 3 Number of compounding periods per year                                                      1 1*2/3 Interest per period (PMT) $                                       117.00 Bond price (PV) $                                     -940.00 4 Number of years to maturity 15 5 = 4*3 Number of compounding periods till maturity (NPER)                                                    15 Bond yield to maturity RATE(NPER,PMT,PV,FV) Bond yield to maturity 12.61% (Pre-tax cost of debt) Bond yield to maturity 8.20% (After-tax cost of debt) 12.61%*(1-35%)

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