Olympic Sports has two issues of debt outstanding. One is a 7% coupon bond with

Question

Olympic Sports has two issues of debt outstanding. One is a 7% coupon bond with a face value of $26 million, a maturity of 15 years, and a yield to maturity of 8%. 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 8%. The face value of the issue is $31 million, and the issue sells for 95% of par value. The firm's tax rate is 35%.

What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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.)

a.

What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

The yield to maturity of the second bond:

Face value =$31,000,000

Price of the bonds = $31,000,000 * 95%

=$29,450,000.

Coupon rate =8%

Coupon payment =$31,000,000 *8%

=$2,480,000

Years to maturity =20.

Formula for YTM = [C+(F-P)/n]/(F+P)/2

= [$2,480,000 + ($31,000,000 - $29,450,000)/20]/($31,000,000+$29,450,000.)/2

=0.084615*100

=8.46%.

Answer for subpoint a:

Answerr for subpoint b:

Particulars YTM Face value Interest payment 7% Coupon bonds 8% $26,000,000.00 $2,080,000.00 8% Coupon bonds 8.46% $31,000,000.00 $2,623,076.92 Total $4,703,076.92

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