Question

3 Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 3.84 percent, a par value of $1,0

0 0
Add a comment Improve this question Transcribed image text
Answer #1
MV of Bond1=Par value*bonds outstanding*%age of par
MV of Bond1=1000*5300*1.02
=5406000
MV of Bond2=Par value*bonds outstanding*%age of par
MV of Bond2=1000*9600*1.05
=10080000
Cost of debt
Bond1
                  K = Nx2
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =7x2
1020 =∑ [(3.84*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^7x2
                   k=1
YTM1 = 3.5152024507
Bond2
                  K = Nx2
Bond Price   =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                   K =16x2
1050 =∑ [(6.61*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^16x2
                    k=1
YTM2 = 6.12
Firm cost of debt=YTM1*(MV bond1)/(MV bond1+MV bond2)+YTM2*(MV bond2)/(MV bond1+MV bond2)
Firm cost of debt=3.5152024507*(5406000)/(5406000+10080000)+6.12*(5406000)/(5406000+10080000)
Firm cost of debt=5.21%
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 5.21*(1-0.39)
= 3.1781
Add a comment
Know the answer?
Add Answer to:
3 Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT