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I need the answer to this question, but please reference the problem and solution I have attached here at the
end.That question has the right answer, just the problem has different values.
Olympic Sports has two issues of debt outstanding. One is a 7% coupon bond with a face value of $26 million, a maturity of 15 years, and a yield to maturity of 8%. The coupons are paid annually. The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 8%. The face value of the issue is $31 million, and the issue sells for 95% of par value. The firm’s tax rate is 35%.
a. What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b. What is Olympic’s after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
***SOLUTION FOR THE SAME TYPE OF PROBLEM ONLY THE PROBLEM HAS DIFFERENT VALUES****
Olympic Sports has two issues of debt outstanding. One is a 8% coupon bond with a face value of $31 million, a maturity of 10 years, and a yield to maturity of 9%. The coupons are paid annually. The other bond issue has a maturity of 15 years, with coupons also paid annually, and a coupon rate of 9%. The face value of the issue is $36 million, and the issue sells for 93% of par value. The firm’s tax rate is 35%.
a. What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
| Before-tax cost of debt : 9.49 ± 1% |
b. What is Olympic’s after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
After-tax cost of debt : 6.17 ± 1%
Explanation:
| Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual calculations. |
| a. |
| First, compute the price of the 8% coupon bonds for each $1,000 of face value: |
| PV | = [(.08 × $1,000) × (1 / .09 – {1 / [.09(1 + .09)10]})] + $1,000 / (1 + .09)10 |
| = $935.82 |
| This means that each 8% coupon bond is selling for 93.582% of face value. Thus, the total market value of the issue is: |
| Market value | = .93582 × $31m |
| = $29,010,526 | |
| The 9% coupon bonds are selling at 93% of face value, thus the market value of that issue is: | |
| Market value | = .93 × $36m |
| = $33,480,000 | |
| Total market value | = $29,010,526 + 33,480,000 |
| = $62,490,526 | |
| We also need to know the yield to maturity for the 9% bonds: |
| PV = $930 = [(.09 × $1,000) × ((1 / r) – {1 / [r(1 + r)15]})] + $1,000 / (1 + r)15 |
| Using trial-and-error, a financial calculator, or a computer, we find that: |
| r = 9.9159% |
| We can now calculate the before-tax cost of debt: |
| Before-tax cost of debt | = WA× rA + WB× rB |
| = [($29,010,526 / $62,490,526) × .09] + [($33,480,000 / $62,490,526) × .099159] | |
| = .0949, or 9.49% | |
| b. | |
| After-tax cost of debt | = Before-tax cost of debt × (1 – Tc) |
| = 9.49% × (1 – .35) | |
| = 6.17% |
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