Why is It a standard practice to estimate the cost of debt using yield to maturity...
Why is It a standard practice to estimate the cost of debt using yield to maturity on a portfolio of bonds with similar credit rating and maturity as the firm’s outstanding debt?
Homework Answers
Raising capital through issuing bonds is one of the ways of raising debt. A firm's outstanding debt may not be market traded. However, since bonds are market traded, it is easy to find the market value of bonds. Thus , if one is able to find a portfolio of bonds which are similar in credit rating (riskiness) and maturity as the outstanding debt, the Yields on the bonds can be used to find the cost of debt and subsequently value of firm's debt.
The reason to use Yield to maturity and not any other yield is because the Firm's outstanding debt is also assumed to be carried till maturity. Thus, the value of a firm's outstanding debt or its Cost can be estimated using the Yield to maturity (YTM) of portfolio of bonds with similar credit rating and maturity.
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Why is It a standard practice to estimate the cost of debt using
yield to maturity...
(Individual or component costs of capital) Your firm is considering a new investment proposal and would...
(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: a. A bond that has a $1.000 par value (face value) and a contract or coupon interest rate of 12.4 percent that is paid semiannually. The bond is currently selling for a price of $1,125 and will mature in 10...
Yield to Maturity and Cost of debt
Octopus Transit has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $94, payable semiannually, and is currently selling for $1,100. Octopus is in a 35 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the...
T/F: If you are using the yield to maturity from outstanding bonds to infer the cost of debt it is important that the bo...
T/F: If you are using the yield to maturity from outstanding bonds to infer the cost of debt it is important that the bonds be zero coupon bonds.
A company is trying to estimate the cost of debt for a new project. For their...
A company is trying to estimate the cost of debt for a new project. For their estimate, they will find the yield to maturity on existing company bonds. They have one outstanding bond issue at the moment that will mature in 15.00 years. The bond pays an annual coupon of 9.00%, with a face value of $1,000. The bond currently trades at 91.00% of face value. What is the yield to maturity on the existing debt? Submit Answer format: Percentage...
After-Tax Cost of Debt LL Incorporated's currently outstanding 8% coupon bonds have a yield to maturity of 13%. LL belie...
After-Tax Cost of Debt LL Incorporated's currently outstanding 8% coupon bonds have a yield to maturity of 13%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? Round your answer to two decimal places.?
Problem 11-9 Approximate yield to maturity and cost of debt [LO3] Airborne Airlines Inc. has a...
Problem 11-9 Approximate yield to maturity and cost of debt [LO3] Airborne Airlines Inc. has a $1,000 par value bond outstanding with 15 years to maturity. The bond carries an annual interest payment of $94 and is currently selling for $940. Airborne is in a 35 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as...
QUESTION: Mr. Goemin has just been hired to compute the cost of capital of debt, bonds,...
QUESTION: Mr. Goemin has just been hired to compute the cost of capital of debt, bonds, preference shares and ordinary shares for LCDLtd. • Because LCD’s short term and long term debts do not trade very frequently, Mr. G has decided to use 11% as cost of debt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as LCD’s outstanding debt. In addition, LCD faces a corporate tax rate of 30%....
Cost of Debt Jones, Inc has one outstanding bond issue, which has twelve years remaining to...
Cost of Debt Jones, Inc has one outstanding bond issue, which has twelve years remaining to maturity and a coupon rate of 2.325%. Interest payments are made semi-annually, the firm’s tax rate is .35, and the bonds are currently trading at $1,021.00. What is the yield to maturity on the bonds? Ignoring flotation costs, what is the firm’s cost of debt (before tax)? What is its after-tax cost of debt?
The Holmes Company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity....
The Holmes Company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places.
The Holmes Company's currently outstanding bonds have a 7% coupon and a 10% yield to maturity....
The Holmes Company's currently outstanding bonds have a 7% coupon and a 10% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places.
(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: a. A bond that has a $1.000 par value (face value) and a contract or coupon interest rate of 12.4 percent that is paid semiannually. The bond is currently selling for a price of $1,125 and will mature in 10...
The Holmes Company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places.
The Holmes Company's currently outstanding bonds have a 7% coupon and a 10% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places.
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