Question

Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 3.72 percent, a par value of $2,000 per bond, matures in 7 years, has a total face value of $4.7 million, and is quoted at 104 percent of face value. The second issue has a coupon rate of 6.49 percent, a par value of $1,000 per bond, matures in 19 years, has a total face value of $9.0 million, and is quoted at 96 percent of face value. Both bonds pay interest semiannually. The company's tax rate is 39 percent. What is the firm's weighted average aftertax cost of debt?

a. 3.36%

b. 5.50%

c. 3.03%

d. 3.20%

e. 4.43%

Answer 1

Correct option is: a. 3.36%
	Market Value	Weight	YTM	WACC
First Issue	$       48,88,000	0.3613	1.88%	0.68%
Second Issue	$       86,40,000	0.6387	4.19%	2.68%
	$   1,35,28,000			3.36%
Workings:
	Market Value	Weight	YTM	WACC
First Issue	4700000*1.04	$4888000 / $13528000	=RATE(7*2,37.2/2,-1040,1000)*2*(1-0.39)	0.3613 X 1.88%
Second Issue	9000000*0.96	$8640000 / $13528000	=RATE(19*2,64.9/2,-960,1000)*2*(1-0.39)	0.6387 X 4.19%