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	5.8%	105	5 years	$ 19,000,000
2	6.4	115	9 years	45,000,000
3	5.8	108	19 years	47,000,000
4	6.7	119	31 years	58,000,000

3.24%

4.98%

3.4%

3.11%

3.08%

Answer 1

Bond	Coupon Rate	Price Quote	Maturity	Face Value	Weight
1	5.8%	105	5 years	19,000,000.00	0.15
2	6.4	115	9 years	4,500,000.00	0.04
3	5.8	108	19 years	47,000,000.00	0.37
4	6.7	119	31 years	58,000,000.00	0.45
We need to find yield to maturity for all the bonds			Tax rate	35%
Using yield formula we can find yield to maturity
After tax cost of debt is found using the formula Yield to maturity*(1-tax rate)
Bond	Yield to maturity	After tax cost of debt
1	4.67%	3.03%
2	4.37%	2.84%
3	5.14%	3.34%
4	5.43%	3.53%
Now we need to find the overall cost of debt by weighted average formula
Weight of each bond is found using face value/Sum of all the face values
Cost of debt	3.4%	Using sumproduct of weights and after tax cost of debt