Russell Container Corporation has a $1,000 par value bond outstanding with 30 ye

Question

Russell Container Corporation has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $120 and is currently selling for $820 per bond. Russell Corp. is in a 40 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. a. Compute the yield to maturity on the old issue and use this as the yield for the new issue

Make the appropriate tax adjustment to determine the aftertax cost of debt.

Make the appropriate tax adjustment to determine the aftertax cost of debt.

Explanation / Answer

A Yield to maturity (Interest(1-tax)+(Face Value- Fair Market value)/n)/(Maturity value+Isssue Value)/2 Yield to Maturity 0.034615 B Yield to maturity (Interest(1-tax)+(Face Value- Fair Market value)/n)/(Maturity value+Isssue Value)/2 Yield to Maturity 0.021429

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.