Points awarded based off showing work and correctness Ying Import has several bo

Question

Points awarded based off showing work and correctness

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 31 percent, what is the aftertax cost of Ying's debt?

Bond

Coupon Rate

Price Quote

Maturity

Face Value

Bond

Coupon Rate

Price Quote

Maturity

YTM

Face Value

1 6%      101      4 years        5.72% $ 23,000,000    2 7.3%         110      6 years        5.33% $40,000,000    3 6.1%         101      14.5 years        6% $44,000,000    4 6.9%         113      28.5 years        5.95% $60,000,000   

Explanation / Answer

aftertax cost of Ying's debt = weighted average cost of debt of each bond

before tax cost of Ying's debt = (5.72%*23,23,000+5.33%*44,00,000+ 6%*44,44,000 +5.95%*67,80,000)/(23,23,000+44,00,000+44,44,000+67,80,000) = 5.78%

after tax cost of Ying's debt = 5.78%*(1-31%) = 3.99%

Bond Coupon Rate Price Quote Maturity YTM Face Value Market Value of Debt 1 6% 101 4 years 5.72% 2,30,00,000 23,23,000 2 7.30% 110 6 years 5.33% 4,00,00,000 44,00,000 3 6.10% 101 14.5 years 6% 4,40,00,000 44,44,000 4 6.90% 113 28.5 years 5.95% 6,00,00,000 67,80,000

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