Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of...

Free

50.1K

Verified Solution

Question

Finance

Great Lakes Packing has two bond issues outstanding. The firstissue has a coupon rate of 3.42 percent, a par value of $1,000 perbond, matures in 4 years, has a total face value of $3.2 million,and is quoted at 105 percent of face value. The second issue has acoupon rate of 5.62 percent, a par value of $2,000 per bond,matures in 17 years, has a total face value of $7.5 million, and isquoted at 91 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?

Answer & Explanation Solved by verified expert

3.6 Ratings (456 Votes)

MV of Bond1=Par value*bonds outstanding*%age of par

MV of Bond1=1000*3200*1.05

=3360000

MV of Bond2=Par value*bonds outstanding*%age of par

MV of Bond2=2000*3750*0.91

=6825000

Cost of debt

Bond1

K = Nx2

Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2

k=1

K =4x2

1050 =? [(3.42*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^4x2

k=1

YTM1 = 2.1099317081

Bond2

K = Nx2

Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2

k=1

K =17x2

1820 =? [(5.62*2000/200)/(1 + YTM/200)^k] + 2000/(1 + YTM/200)^17x2

k=1

YTM2 = 6.5

Firm cost of debt=YTM1*(MV bond1)/(MV bond1+MV bond2)+YTM2*(MV bond2)/(MV bond1+MV bond2)

Firm cost of debt=2.1099317081*(3360000)/(3360000+6825000)+6.5*(3360000)/(3360000+6825000)

Firm cost of debt=5.05%

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 5.05*(1-0.39)

= 3.08

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Great Lakes Packing has two bond issues outstanding. The firstissue has a coupon rate of 3.42 percent, a par value of $1,000 perbond, matures in 4 years, has a total face value of $3.2 million,and is quoted at 105 percent of face value. The second issue has acoupon rate of 5.62 percent, a par value of $2,000 per bond,matures in 17 years, has a total face value of $7.5 million, and isquoted at 91 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?