Ying Import has several bond issues outstanding, each making semiannual interest
ID: 2760781 • 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 32 percent, what is the aftertax cost of Ying's debt (leave your answer as an APR)? (Do not round your intermediate calculations.)
Bond
Coupon Rate
Price Quote (% of Face Value)
Maturity
Face Value
Bond
Coupon Rate
Yield to MaturityPrice Quote (% of Face Value)
Maturity
Face Value
1 5.90% 4.11% 105 3 years $ 19,000,000 2 6.40% 4.48% 110 6 years $ 42,000,000 3 5.10% 4.74% 104 16 years $ 45,000,000 4 6.20% 5.18% 115 28 years $ 63,000,000Explanation / Answer
Solution :
we need to first find the market value of debt and then the weightage :
M1 = 19,000,000*105 = 1995000000
M2 = 42,000,000*110 = 4620000000
M3 = 4680000000
M4 = 7245000000
Total market value = 1995000000+4620000000+4680000000+7245000000
= 18540000000
weights :
M1 = 1995000000/18450000000 = .107
M2 = .249
M3 = .252
M4 = .390
Now multiply the weights to YTM
= .107*4.11% + .249*4.48% +.252*4.74% + .390*5.18%
=pre tax cost of debt = 4.8%
hence post tax cost of debt = 4.8%(1-tax rate)
= 4.8*.68
= 3.264% is the post tax cost of debt
Thank you.
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