Answer:
Find the answers below
Explanation:
The total book value of the debt is the sum of the two bonds book values
total book value=$60 million+$35 million=$95 million
Total market value of bonds is the sum of the two bonds market values
total market values=$60 million*91%+$35 million*51%
=$54.6 million+$17.85 million=$72.45 million
After tax cost of debt =pretax cost of debt*(1-t) where t is the tax rate of 38% or 0.38
For the first bond:
=rate(nper,pmt,-pv,fv)
nper is the number of interest the bonds would pay from now on,i.e (15-4)*2=22
pmt is the semiannual interest payment,which is:$60 million*10%/2=$3 million
pv is the market value of $54.6 million
fv is the book value of $60 million
=rate(22,3,-54.6,60)=5.73%
5.73% is the semiannual rate ,where 11.46% is the annual rate
after tax cost of debt=11.46%*(1-0.38)=7.11%
the second bond:
nper is 11 (11 years left to maturity)
pmt is nil since it is a zero coupon bond
pv is $17.85 million
fv is $35 million
=rate(11,0,-17.85,35)=6.31%
after tax cost of debt=6.31%
*(1-0.38)=3.91%
