Keyspan corp. is planning to issue debt that will mature in 2,030. In many respe

Question

Keyspan corp. is planning to issue debt that will mature in 2,030. In many respects, the issue is similar to the currently outstanding debt of the corporation. Use Table 11-3.

a. Calculate the yield to maturity on similarly outstanding debt for the firm, in terms of maturity. (Input your answer as a percent rounded to 2 decimal places.)

Assume that because the new debt wil be issued at par, the required yield to maturity will be .25 percent higher than the value determined in part a.

b. What is the new yield to maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

c. If the firm is in a 35 percent tax bracket, what is the aftertax cost of debt for the yield determined in part b? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Table 11-3 Excerpt from S&P Capital IQ Net Advantage Maturity Date (MM/ Yield To 52-Week 2-Week S&P Coupon Maturity Low Price High Sales Current Price Price Yield Company Ticker CUSIP Issue DD/YYYY) Callable Industry % KeySpan N/A 49337WAC4 Nt 11/15/2030 Yes N/A 8.00 4.57 N/A 0.00 138.075 5.79 Corp KeySpan N/A 49337WAH3 Nt 04/01/2030 Yes N/A 5.88 4.35 N/A 0.00 118.919 4.94 Corp KeySpan N/A 49337WAJ9 Nt 04/01/2035 Yes N/A 5.80 4.32 N/A 0.00 119.662 4.84 Corp

Explanation / Answer

Answer:

Ans a.)

Yield to maturity: YTM is the sum of amount of yield earned till at the end of the maturity period.

From the available information in the table, the yield to maturity of similar outstanding debt of the firm, in terms of maturity is 4.32% with the maturity in the year 2030.

Ans b.)

Since, the new debt wil be issued at par, the required yield to maturity will be 0.25 % higher than the value determined in part a.

So the new yield to maturity is = 4.32% + 0.25%

The new yield to maturity = 4.57%

Ans c.) If the firm is in a 35 percent tax bracket, the aftertax cost of debt for the yield determined in part b is:

(Cost of Debt) Kd = Yield (1 – T)

(Cost of Debt) K d= 4.57% (1 – .35)

(Cost of Debt) Kd = 2.97%

So the after tax cost of debt is 2.97%

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