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.

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             %

Bond Coupon Rate Price Quote Maturity Face Value 1 8.50 % 106.0 5 years $ 19,000,000 2 6.50 94.4 8 years 39,000,000 3 8.20 104.8 15.5 years 44,000,000 4 8.70 94.6 25 years 59,000,000

Explanation / Answer

1 8.50 % 106.0 5 years $ 19,000,000
2 6.50 94.4 8 years 39,000,000
3 8.20 104.8 15.5 years 44,000,000
4 8.70 94.6 25 years 59,000,000

Price of 1st bond=106%*19000000

YTM of 1st bond=7.0551%

Price of 2nd bond=94.4%*39000000

YTM of 2nd bond=7.4414%

Price of 3rd bond=104.8%*44000000

YTM of 3rd bond=7.6655%  

Price of 4th bond=94.6%*59000000

YTM of 4th bond=9.258%

Pre-tax cost of debt=(106%*19000000*7.0551%+94.4%*39000000*7.4414%+104.8%*44000000*7.6655%+94.6%*59000000*9.258%)/(106%*19000000+94.4%*39000000+104.8%*44000000+94.6%*59000000)

=8.0956%

Hence, after-tax cost of debt=8.0956%*(1-34%)=5.3431%

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