At the present time, Omni Consumer Products Company (OCP) has 15-year noncallable bonds with a face...

At the present time, Omni Consumer Products Company (OCP) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 30%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)

Expert Solution

Step-1, The Yield to maturity (YTM) of the Bond

The Yield to maturity (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)


Variables	Financial Calculator Keys	Figure

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 12.00%]	PMT	120
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [15 Years]	N	15
Bond Price/Current Market Price of the Bond [-$1,329.55]	PV	-1,329.55

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity on the bond (1/Y) = 8.12%.

Step-2, The firm’s after-tax cost of debt

The firm’s after-tax cost of debt on the Bond is the after-tax Yield to maturity (YTM)

The After-tax cost of debt = Yield to maturity on the bond x (1 – Tax Rate)

= 8.12% x (1 – 0.30)

= 8.12% x 0.70

= 5.68%

“Hence, the firm’s after-tax cost of debt will be 5.68%”

jeff jeffy answered 1 month ago

1. At the present time, Three Waters Company (TWC) has 10-year noncallable bonds with a face...

1. At the present time, Three Waters Company (TWC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,092.79 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your...

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.3% annual coupon bonds at their...

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.3% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity? Select the correct answer. a. $1,172.61 b. $1,176.61 c. $1,174.61 d. $1,170.61 e. $1,178.61 Please, show all the steps. Thank you.

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 5.2% annual coupon bonds at their...

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 5.2% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

LeXnews has 15-year bonds outstanding with a face value of $1,000 and a market price of...

LeXnews has 15-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest semi-annually and have a yield to maturity of 4.03 percent. What is the coupon rate? A) 3.80 percent B) 3.15 percent C) 4.15 percent D) 3.60 percent E) 4.10 percent 32) The 6 percent annual coupon bonds of IPO, Inc., are selling for $1,187. The bonds have a face value of $1,000 and mature in 11 years. What is...

1. One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 6.3% annual coupon bonds at...

1. One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 6.3% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity? 2. CMS Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity...

5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,200 face value and...

5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,200 face value and a 8% coupon, semiannual payment ($48 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 40%, what is the firm's after-tax cost of debt? Round your answer to 2 decimal places. Do not round intermediate calculations.

Omni Consumer Products Co. is expected to generate a free cash flow (FCF) of $2,875.00 million this year (FCF₁ = $2,875.00 million)

Omni Consumer Products Co. is expected to generate a free cash flow (FCF) of $2,875.00 million this year (FCF₁ = $2,875.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Omni Consumer Products Co.’s weighted average...

On January 1, Soren Enterprises issued 15-year bonds with a face value of $200,000. The bonds...

On January 1, Soren Enterprises issued 15-year bonds with a face value of $200,000. The bonds carry a contract interest rate of 8 percent, and interest is paid semi-annually. On the issue date, the annual market interest rate for bonds issued by companies with similar riskiness was 10 percent. The issuance price of the bonds was $169,255. Which ONE of the following would be included in the journal entry necessary on the books of the bond issuer to record theSECOND...

An investor wishes to be sure she has $20 million in 15 months’ time. At present, 1-year...

An investor wishes to be sure she has $20 million in 15 months’ time. At present, 1-year and 2-year zero-coupon bonds are priced to yield 9.7%. The investor sets up a bond portfolio using the duration-matching principle. Three months after setting up the portfolio, the yields on both bonds increase to 10.2% and then remain at that level for a further 12 months. Assume that all months are of equal length, that all bonds have a par value of $100, and that investors...

Issued 15 year, $80,000 face value, 4.5% bonds on July 1 at 103. The bonds were...

Issued 15 year, $80,000 face value, 4.5% bonds on July 1 at 103. The bonds were sold to yield an effective annual rate of 4.227885%, and they pay interest every Jan 1 and Jul 1. Accrue bond interest payable and amortize bond discount/premium. Jumukha Corp. uses effective-interest amortization. (Hint: the bond was issued midway through year.)

Question