Question

In: Accounting

Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of...

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%

Solutions

Expert Solution

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%

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