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 35 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%	103	8 years	$ 24,000,000
2	6.8	108	11 years	42,000,000
3	6.3	101	22 years	43,000,000
4	7.3	115	34 years	58,000,000

a) 6.02%

b) 4.11%

c) 3.92%

d) 3.76%

e) 3.72%

Answer 1

Solution:

First we need to calculate market value weights

TBonds	Market value	Market value weights
1 (240,00,000/100)*103	24,72,0000	0.13717
2 (420,00,000/100)*108	45,36,0000	0.25171
3 ( 430,00,000/100)*101	43,43,0000	0.241
4 (580,00,000/100)*115	66,70,0000	0.37012
Total	1,80,21,0000	1

Calculation of YTM ( Rate) assuming semi annual compounding

Bond 1:

Coupon rate = 6%

Interest (PMT) = 6%/2*100= $3

FV = $100

PV =$103

Years to maturity= 8 years

Nper =8*2= 16

Rate (nper,PMT,PV, FV)

Rate ( 16,3,-103,100)= 2.77%

YTM = 2.77%*2= 5.54%

Bond 2:

Coupon rate = 6.8%

Interest amount (PMT) = 6.8%/2*100= $3.40

FV = $100

PV =$108

Years to maturity = 11 years

Nper =11*2= 22

Rate ( 22, 3.40,-108,100)= 2.90%

YTM = 2.90%*2= 5.80%

Bond 3:

Coupon rate =6.3%

Interest amount (6.3%/2)*100= $3.15

FV =$100

PV = $101

Years to maturity =22 years

Nper =22*2=44

Rate (44,3.15,-101,100)= 3.11%

YTM =3.11%*2= 6.22%

Bond 4:

Coupon rate =7.3%

Interest (PMT) = (7.3%/2)*100= $3.65

PV = $115

FV = $100

Years to maturity=34 years

Nper =34*2= 68

Rate ( 68,3.65,-115,100)= 3.12%

YTM =3.12%*2= 6.24%

Before tax cost of debt = 5.54%*0.13717+ 5.80%*0.25171 + 6.22%*0.241 + 6.24%*0.37012= 6.03%

After tax cost of debt =6.03%*(1-0.35)= 3.92%

Option C is correct