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

Question

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. Bond Coupon Rate Price Quote Maturity Face Value 1 5.6 % 105.46 5 years $ 36,000,000 2 7.1 114.12 8 years 31,000,000 3 6.8 112.67 15.5 years 51,000,000 4 6.4 101.91 25 years 46,000,000 If the corporate tax rate is 30 percent, what is the aftertax cost of the company’s debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Yield to maturity for

Bond 1:

Coupons=5.6%*100/2=2.8

N=5*2=10

P=105.46

y=4.37%

Bond 2:

Coupons=7.1*100/2=3.55

N=8*2=16

P=114.12

y=4.94%

Bond 3:

Coupons=6.8*100/2=3.4

N=15.5*2=31

P=112.67

y=5.57%

Bond 4:

Coupons=6.4*100/2=3.2

N=25*2=50

P=101.91

y=6.25%

Market Value for

Bond 1: 36000000*105.46/100=37965600

Bond 2: 31000000*114.12/100=35377200

Bond 3: 51000000*112.67/100=57461700

Bond 4: 46000000*101.91/100=46878600

We take market value and not Book Value or Face Value for cost of debt calculation

Pre-tax cost of debt=(MV1*y1+MV2*y2+MV3*y3+MV4*y4)/(MV1+MV2+MV3+MV4)

=(37965600*4.37%+35377200*4.94%+57461700*5.57%+46878600*6.25%)/(37965600+35377200+57461700+46878600)

=5.3676%

After tax cost of debt=pre-tax cost of debt*(1-tax rate)=*(1-30%)=%

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