Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after ta
ID: 2652183 • Letter: Y
Question
Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments. Bond A has a coupon rate of 4.0%; a price quote 104; maturity is 6 years; and the face value is $50,000. Bond B has a coupon rate of 6.5%; a price quote of 109; maturity is 9 years; and the face value is $30,000. Bond C has a coupon rate of 9.2%; a price quote of 95; maturity is 16 years; and the face value $60,000. Bond D has a coupon rate of 9.9%; a price quote of 110; maturity is 24 years; and the face value is $40,000.
Explanation / Answer
YTM = {Interest + [Redemption value-issue price ]/2 } / [(redemption price+issue price)/2]
Bond A= Issue price = 50000*104/100= $ 52000
YTM ={ 2000 +[50000-52000]/2} / [(50000+52000)/2]
= { 2000 - 333.33} /[102000/2]
=1666.67 / 51000
= 3.26 %
BondB =Issue price = 30000*109/100 = 32700
YTM ={ 1950 + [30000-32700]/9 } /[(30000+32700)/2]
= { 1950 + [-2700/9 ]} /[62700/2]
= { 1950 -300} /31350
= 1650/31350
=5.26%
Bond C=Issue price= 60000*95/100 =57000
YTM= { 5520 + [60000-57000)/16 } /[(60000+57000)/2]
= { 5520 +[3000/16]} / [117000/2]
={ 5520 +187.5} /58500
=9.76%
Bond D= issue price =40000*110/100 =44000
YTM ={ 3960 + [40000-44000]24} /[(40000+44000)/2]
= {3960 +[-4000/24]} /[(84000/2]
= { 3960 -166.67 } /42000
=3793.33/42000
= 9.03%
BOnd YTM After tax YTM= YTm(1-tax) A 3.26 3.26(1-.35) = 2.119% B 5.26 5.26(1-.35)= 3.419% C 9.76 9.76(1-.35) = 6.344% D 9.03 9.03(1-.35) = 5.870%Related Questions
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