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Great Lakes Packing has two bond issues outstanding. The firstissue has a coupon rate...

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Accounting

Great Lakes Packing has two bond issues outstanding. The firstissue has a coupon rate of 3.72 percent, a par value of $2,000 perbond, matures in 7 years, has a total face value of $4.7 million,and is quoted at 104 percent of face value. The second issue has acoupon rate of 6.49 percent, a par value of $1,000 per bond,matures in 19 years, has a total face value of $9.0 million, and isquoted at 96 percent of face value. Both bonds pay interestsemiannually. The company's tax rate is 39 percent. What is thefirm's weighted average aftertax cost of debt?

a. 3.36%
b. 5.50%
c. 3.03%
d. 3.20%
e. 4.43%

Answer & Explanation Solved by verified expert
4.5 Ratings (1091 Votes)

Correct option is: a. 3.36%
Market Value Weight YTM WACC
First Issue $       48,88,000                                0.3613 1.88% 0.68%
Second Issue $       86,40,000                                0.6387 4.19% 2.68%
$   1,35,28,000 3.36%
Workings:
Market Value Weight YTM WACC
First Issue 4700000*1.04 $4888000 / $13528000 =RATE(7*2,37.2/2,-1040,1000)*2*(1-0.39) 0.3613 X 1.88%
Second Issue 9000000*0.96 $8640000 / $13528000 =RATE(19*2,64.9/2,-960,1000)*2*(1-0.39) 0.6387 X 4.19%

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In: AccountingGreat Lakes Packing has two bond issues outstanding. The firstissue has a coupon rate of...Great Lakes Packing has two bond issues outstanding. The firstissue has a coupon rate of 3.72 percent, a par value of $2,000 perbond, matures in 7 years, has a total face value of $4.7 million,and is quoted at 104 percent of face value. The second issue has acoupon rate of 6.49 percent, a par value of $1,000 per bond,matures in 19 years, has a total face value of $9.0 million, and isquoted at 96 percent of face value. Both bonds pay interestsemiannually. The company's tax rate is 39 percent. What is thefirm's weighted average aftertax cost of debt?a. 3.36%b. 5.50%c. 3.03%d. 3.20%e. 4.43%

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