a. Calculate the yield to maturity on similarly outstanding debt for the firm, i

Question

a. Calculate the yield to maturity on similarly outstanding debt for the firm, in terms of maturity. (Input your answer as a percent rounded to 2 decimal places.)
  

Yield: ___%

Assume that because the new debt wil be issued at par, the required yield to maturity will be .25 percent higher than the value determined in part a.

b. What is the new yield to maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

Yield: ___%

c. If the firm is in a 35 percent tax bracket, what is the aftertax cost of debt for the yield determined in part b? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
  

Aftertax cost of debt: ___%

Table 11-3 Excerpt from S&P; Capital IQ Net Advantage Maturity Date (MM/ Yield To 52-Week 2-Week S&P; Coupon Maturity Low Price High Sales Current Price Price Yield Company Ticker CUSIP Issue DD/YYYY) Callable Industry % KeySpan N/A 49337WAC4 Nt 11/15/2030 Yes N/A 8.00 4.57 N/A 0.00 138.075 5.79 Corp KeySpan N/A 49337WAH3 Nt 04/01/2030 Yes N/A 5.88 4.35 N/A 0.00 118.919 4.94 Corp KeySpan N/A 49337WAJ9 Nt 04/01/2035 Yes N/A 5.80 4.32 N/A 0.00 119.662 4.84 Corp

Explanation / Answer

a) The yield to maturity (YTM) in this case will be equal to the YTM of bonds having similar maturity, i.e., maturity in 2035. From the given table, we can see that only one bond matures in 2035 which has a YTM of 4.32%. Therefore, YTM for the bonds will be 4.32%.

b) New YTM = 4.32% + 0.25% = 4.57%

c) After tax cost of debt = YTM x (1 - tax rate) = 4.57% x (1 - 0.35) = 2.97%

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