Walter Corp.'s outstanding bonds have a 5.8% coupon, 5 years left until maturity, and are currently...

Walter Corp.'s outstanding bonds have a 5.8% coupon, 5 years left until maturity, and are currently priced at $974.67. The firm's marginal tax rate is 33%. Walter's after-tax cost of debt is ____%. Round your final answer to 2 decimal places (example: enter 12.34 for 12.34%), but do not round any intermediate work in the process. {And, do not convert to effective annual yield.}

Solutions

Expert Solution

YTM is the rate at which the intrinsic value of bond is equal to its current market price. Intrinsic value of the bond is the present value of cash inflows from the bond, i.e., present value of coupon payments and present value of maturity value using YTM as the discount rate. The rate at which total of these present values is equal to the current market price is the YTM. It is just like IRR. IRR equates the initial outlay with the present value of cash inflows of the project. Similarly, in case of a Bond, the initial outlay is the current market price (which you pay to get the bond) and the inflows are the coupon payments and maturity value.

Assuming $1000 par value and maturity value, we first compute the before - tax cost of debt using the "RATE" formula in excel -

Annual coupon payment = $1000 x 5.8% = $58

No. of years to maturity = 5, market price = $947.67, maturity value = $1000

Therefore, Pre - tax cost of debt = 6.40801488521%

After - tax cost of debt = Pre - tax cost of debt x (1 - tax rate) = 6.40801488521% x (1 - 0.33) = 4.29336997% or 4.29% (enter as 4.29)

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Mirha Corp has outstanding bonds with 10 years left to maturity and 5 years left of...

Mirha Corp has outstanding bonds with 10 years left to maturity and 5 years left of call protection. The bonds have a coupon rate of 10%, par value of $1,000, and a call price of $1100. The bonds are currently selling for $1,365. If interest rates remain at current levels, what yield should an investor wishing to hold the bond long-term expect to earn?

A company currently have semi-annual $1,000 face value bonds outstanding with 20 years left until maturity...

A company currently have semi-annual $1,000 face value bonds outstanding with 20 years left until maturity that pay 6-percent annual coupons. The bonds are currently trading at a discount of 96 percent of the par value, and there are 1,500 bonds outstanding. The company also have 50,000 preferred shares outstanding providing a $2 annual dividend with a $25 per share par value and currently trading at $23.50 per share. The company has a beta of 1.18, and present market conditions...

timco bonds are currently valued atb1010. they have 4 years until maturity and the coupon rate...

timco bonds are currently valued atb1010. they have 4 years until maturity and the coupon rate is 4%. what is the yield?

Eades Corp. has 9% annual coupon bonds that are callable and have 18 years left until...

Eades Corp. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,130.35. However, Eades Corp. may call the bonds in eight years at a call price of $1,060. a. What are the YTM and the yield to call (YTC) on Eades Corp.’s bonds? b. If interest rates are expected to remain constant, what is the best estimate of the remaining...

Badger Corp. has 9% annual coupon bonds that are callable and have 18 years left until...

Badger Corp. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,100.35. However, Badger Corp. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Badger Corp.’s bonds? If interest rates are expected to remain constant, what is the best estimate of the remaining life left...

Kaven Corp bonds have a 9% semi-annual coupon, 10 years left till maturity, and they are...

Kaven Corp bonds have a 9% semi-annual coupon, 10 years left till maturity, and they are currently selling for $1179. What is the yield to maturity of Kaven's bonds?

Builtrite bonds have the following5 1/2% coupon, 12 years until maturity, $1000 par and are currently...

Builtrite bonds have the following5 1/2% coupon, 12 years until maturity, $1000 par and are currently selling at $1024. If you purchase this bond, what would be your AYTM?

Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity....

Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,170. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). a. What is the yield to maturity? Round your answer to two decimal places. b. What is the yield to call if they are called in 5 years? Round your answer to two decimal...

Golden Knight has bonds outstanding with a $1,000 face value and 9 years left until maturity....

Golden Knight has bonds outstanding with a $1,000 face value and 9 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,200. The bonds may be called in 5 years at 109% of face value. The bond’s indenture indicates that the call provision gives the firm the right to call the bonds at the end of each year beginning in Year 5. In Year 5, the bonds may be called at 109% of...

Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity....

Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,170. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the yield to call if they are called in 5 years? Do not...

Subjects