Question

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 32 percent, what is the aftertax cost of Ying's debt? (Do not round your intermediate calculations.)

Bond	Coupon Rate	Price Quote	Maturity	Face Value
1	6.3%	102	5 years	$ 17,000,000
2	7	110	8 years	43,000,000
3	5.5	105	20 years	41,000,000
4	6.9	116	34 years	64,000,000
Answer choices: 3.62% 3.77% 5.55% 3.59% 3.96%

Answer 1

Bond 1:

Price = 1.02 * 17,000,000 = 17,340,000

Coupon payment = 0.063 * 17,000,000 = 1,071,000 / 2 = 535,500

Number of periods = 5 * 2 = 10

Cost of debt using a financial calculator = 5.8331%

Keys to use in a fianancial calculator: 2nd I/Y 2, FV 17,000,000, PV -17,340,000, PMT 535,500, N 10, CPT I/Y

Bond 2:

Price = 1.1 * 43,000,000 = 47,300,000

Coupon payment = 0.07 * 43,000,000 = 3,010,000 / 2 = 1,505,000

Number of periods = 8 * 2 = 16

Cost of debt using a financial calculator = 5.4416%

Keys to use in a fianancial calculator: 2nd I/Y 2, FV 43,000,000 , PV -47,300,000, PMT 1,505,000, N 16, CPT I/Y

Bond 3:

Price = 1.05 * 41,000,000 = 43,050,000

Coupon payment = 0.055 * 41,000,000 = 2,255,000 / 2 = 1,127,500

Number of periods = 20 * 2 = 40

Cost of debt using a financial calculator = 5.0983%

Keys to use in a fianancial calculator: 2nd I/Y 2, FV 41,000,000 , PV -43,050,000, PMT 1,127,500, N 40, CPT I/Y

Bond 4:

Price = 1.16 * 64,000,000 = 74,240,000

Coupon payment = 0.069 * 64,000,000 = 4,416,000/ 2 = 2,208,000

Number of periods = 34 * 2 = 68

Cost of debt using a financial calculator = 5.8151%

Keys to use in a fianancial calculator: 2nd I/Y 2, FV 64,000,000 , PV -74,240,000, PMT 2,208,000, N 68, CPT I/Y

Total market value of bonds = 74,240,000 + 43,050,000 + 47,300,000 + 17,340,000 = 181,930,000

Weight of bond 1 = 17,340,000 / 181,930,000 = 0.0953

Weight of bond 2 = 47,300,000 / 181,930,000 = 0.26

Weight of bond 3 = 43,050,000 / 181,930,000 = 0.2366

Weight of bond 4 = 74,240,000 / 181,930,000 = 0.4081

Before tax cost of debt = 0.0953 * 0.058331 + 0.26 * 0.054416 + 0.2366 * 0.050983 + 0.4081 * 0.058151

Before tax cost of debt = 0.005559 + 0.014148 + 0.012063 + 0.023731

Before tax cost of debt = 0.0555 or 5.55%

After tax cost of debt = 0.0555 ( 1 - 0.32)

After tax cost of debt = 0.0377 or 3.77%