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 table below. Bond Coupon Rate Price Quote Maturity Face Value 1 8.50 % 105.5 5 years $ 25,000,000 2 6.70 94.9 8 years 45,000,000 3 8.20 104.3 15.5 years 50,000,000 4 8.70 106.2 25 years 65,000,000 If the corporate tax rate is 34 percent, what is the aftertax cost of the company’s debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt

Explanation / Answer

Bond Bond Coupon rate price face value term Face Value per Bond 1 8.50% 105.5 25000000 5 years 100 2 6.70% 94.9 45000000 8 years 100 3 8.20% 104.3 50000000 15.50 years 100 4 8.70% 106.2 65000000 25 years 100 Corporate tax rate is 34% Calculation of After tax cost of debt After Tax cost of debt Bond Interest calculation Interest payment $ Sale Price $ Efective interest rate Efective Interest * (1- Tax rate) 1 $100*8.5% =$8.5 8.5 105.5 $8.5/105.50 *100 8.06% 8.06% (1-0.34) 5.32% 2 $100*6.7% =$6.7 6.7 94.9 $6.70/94.90 *100 7.06% 7.06%(1-0.34) 4.66% 3 $100*8.2% =$8.2 8.2 104.3 $8.2/104.30 *100 7.86% 7.86%(1-0.34) 5.19% 4 $100*8.7% =$8.7 8.7 106.2 8.70/106.20*100 8.19% 8.19%(1-0.34) 5.41%

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