FINANCE CH 13 Q 15 Olympic sports has two issues of debt outstanding. One is a 9

Question

FINANCE CH 13 Q 15 Olympic sports has two issues of debt outstanding. One is a 9% coupon bond with a face value of $20 million, a maturity of 10 years, and a yield to maturity of 10%. The coupons are paid annually. The other bond issue has a maturity of 15 years, with coupons also paid annually, and a coupon rate of 10%. The face value of the issue is $25 million, and the issue sells for 94% of par value. The firm's tax rate is 35%. a. What is the before-tax cost of debt for Olympic? b. What is Olympic's after-tax cost of debt?

Explanation / Answer

Present Value

$938.55

or

93.86%

Therefore, the market value of the issue is

$18.77

million.

The 10% coupon bond sells for 94% of par value and has a yield to maturity of:

10.83%

The market value of the issue is

$23.50

million.

Weighted-average before-tax cost of debt

=

10.46%

The 9% coupon bond has a yield to maturity of 10% and sells for 93.86% of face value,

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