rites Tools Help Bank of America HealthAma Aly Auto Finance Vehicle.. ?Waterl Lo
ID: 2617893 • Letter: R
Question
rites Tools Help Bank of America HealthAma Aly Auto Finance Vehicle.. ?Waterl Log In Access Managers -Navier t Mortgag 13 6.64/10 Total poirts aswarded He Show my Olympic Sports has two issues of debt outstanding One is an 8% coupon bond with a face value of $36 million, a maturity of 15 years, and a yield to maturity of 9%. The coupons are paid annually The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 9%. The face value of the issue is $41 million, and the issue sells for 95% of par value. The firm's tax rate is 40% what is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as to 2 decimal places.) cost of debt 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
(1) For first issue, YTM is directly given in the question = 9%
(2) For second issue, YTM not given hence we have to calculate it
Coupon * ( 1 - (1+r)-n / r + Par value * ( 1+r)-n = selling price
Coupon = 1000 * 9% = 90, n = years to maturity = 20
We have to find out .......... "r" = YTM
90 * ( 1 - (1+r)-20 / r + 1000 * (1+r)-20 = 950
Let us subsitute ......... r = 9.4%
90 * ( 1 - (1.094)-20 / 0.094 + 1000 * (1.094)-20 = 964.50
Let us substitute ....... r = 9.70%
90 * ( 1 - (1.097)-20 / 0.097 + 1000 * (1.097)-20 = 939.16
Now use interpolation technique to find exact ..... " r " value
9.4 ......... 964.5
r ......... 950
9.7 ........ 939.16
( r - 9.4 ) / (9.7 - 9.4) = ( 950 - 964.5) / ( 939.16 - 964.5)
( r - 9.4 ) / (0.30) = - 14.50 / - 25.34
r - 9.4 = 0.17
r = 9.57 %
Cost of debt before tax
The proportion of bond issue was in the ratio of 36 million : 41 million
= 9 *( 36 / 77) + 9.57 * (41/77) = 9.30
After tax cost of debt
= 9.30 * ( 1 - tax rate ) = 9.30 ( 1 - 0.40 ) = 5.58
Alternative method
Market value method
Market value of first issue = 80* ( 1 - (1.09)-20 / 0.09 + 1000 * (1.09)-20 = 908.71
Total market value = 36000 * 908.71 = 32,713,560
Market value of second issue = 41000 * 950 = 38,950,000
Cost of debt before tax = 9 *( 32,713,560 / 71663560) + 9.57 * (38,950,000/71663560) = 9.31 %
After tax cost of debt = 9.31 * ( 1 - 0.40) = 5.58 %
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.