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Ying Import has several bond issues outstanding, each making semiannual interest

ID: 2718936 • Letter: Y

Question

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 30 percent, what is the aftertax cost of Ying's debt? (Do not round your intermediate calculations.)

Bond

Coupon Rate

Price Quote

Maturity

Face Value

4.28%

4.11%

4.07%

6.12%

4.5%

Bond

Coupon Rate

Price Quote

Maturity

YTM

Face Value

1 6.1%      102      8 years        5.78% $ 23,000,000    2 7.1%         108      11 years        6.09% $41,000,000    3 6%         100      26 years        6% $47,000,000    4 7.1%         111      38 years        6.33% $63,000,000   

Explanation / Answer

To find the after-tax cost of debt for the company, we need to find the weighted average of the four debt issues. We will begin by calculating the market value of each debt issue, which is:
MV1 = 1.02*($23,000,000)
MV1 = $23,460,000
MV2 = 1.08*($41,000,000)
MV2 = $44,280,000
MV3 = 1*($47,000,000)
MV3 = $47,000,000
MV4 = 1.11*($63,000,000)
MV4 = $69,930,000
So, the total market value of the company’s debt is:
MVD = $23,460,000 + 44,280,000 + 47,000,000 + 69,930,000
=184,670,000

The weight of each debt issue is:
w1 = $23,460,000/$184,670,000
w1 =0.12703
w2 = $44,280,000/$184,670,000
w2 =0.23978
w3 = $47,000,000/$184,670,000
w3 = 0.25451
w4 = $69,930,000/$184,670,000
w4 = 0.37868

The weighted average YTM of the company’s debt is thus:
YTM = 5.78%*(0.12703) + 6.09%*(0.23978) + 6%*(0.25451) + 6.33%*(0.37868)
YTM = 6.12%
And the aftertax cost of debt is:
RD = 6.12%*(1 – 0.30)
RD = 4.28%