Question

3. As a measure (estimate) of FDX’s cost of new issued debt, FDX Corp. has a Bond issue outstanding in the market issued on October 17, 2018 of $850,000,000 par value with a coupon rate of 4.950% (paid semiannually) that will mature on October 17, 2048 (assume 27.5 years to maturity or 55 semiannual periods). At a current price of 124.432 percent of par value (assuming a par value of $1000, the bond price is $1,244.32), what is the annual yield (YTM) on this bond (be sure you convert from semiannual to annual). Use this annual return on the outstanding bond issue to estimate FDX’s cost of new, 30-year maturity bonds. After estimating the cost of new FDX debt, calculate FDX’s after tax cost of the new debt assuming a 26 percent income tax rate? Remember: After-tax cost = before-tax cost (1-tax rate).

Data debt costs may be obtained from: https://fred.stlouisfed.org/series/HQMCB30YR

 

Using Excel, determine the Yield to Maturity on outstanding FDX debt:

 

 

 

 

 

 

After-tax cost debt =