please show your work. Russell Container Company has a $1,000 par value bond out

Question

please show your work.

Russell Container Company has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $105 and is currently selling for $880 per bond. Russell is in a 40 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. (Do not round intermediate calculations. Round the final answers to 2 decimal places.) a. Compute the approximate yield to maturity on the old issue and use this as the yield for the new issue. Yield on new issue b. Make the appropriate tax adjustment to determine the aftertax cost of debt. Cost of debt

Explanation / Answer

Coupon = 105
Par = 1000
Coupon rate =105/1000=10.5%
Present Value = 880
N= 30
We need to calculate present yield to maturity

Using excel formula:
=RATE(30,105,-880,1000)
We get ytm = 11.99%

Hence YTM =11.99%


b)

After tax cost of debt = Pretax cost(1-tax rate)
=11.99(1-0.40)
=7.19%

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