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Nataly_w [17]
3 years ago
15

Russell Container Corporation has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual inte

rest payment of $105 and is currently selling for $880 per bond. Russell Corp. is in a 25 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. a. Compute the yield to maturity on the old issue and use this as the yield for the new issue. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) b. Make the appropriate tax adjustment to determine the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Business
1 answer:
12345 [234]3 years ago
3 0

Answer:

Yield on new issue = 11.99%

After tax cost of debt = 8.99%

Explanation:

Given the following :

Future value (FV) = 1000

Period (n) = 30 years

Payment per period (PMT) = $105

Present value (PV) = $880

Tax rate = 25% = 0.25

a. Compute the yield to maturity on the old issue and use this as the yield for the new issue.

Coupon rate = (PMT ÷ par value)

Coupon rate = 105÷ 1000

Coupon rate = 10.50%

Using the financial calculator, bond yield ;

(FV, rate, period, No of payment per year, PV)

Yield on new issue = 11.99%

RATE(n,PMT, PV, FV, 0)

B.) after tax cost of debt, that is, after making necessary tax adjustments

Tax rate = 0.25

After tax cost of debt = yield × (1 - tax rate)

After tax cost = 0.1199 × (1 - 0.25)

After tax cost of debt = 0.1199 × 0.75

After tax cost of debt = 0.089925

After tax cost of debt = 8.99%

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Cincinnati Exporters wants to raise $40 million to expand its business. To accomplish this, it plans to sell 22-year, $1,000 fac
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Answer:

Minimum number of units to be issued = 45,791.4 units

Explanation:

The units of the bonds to be sold to raise the money equals to the price of the bonds divided by the sum to be raised

The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.

These cash flows include interest payment and redemption value

The price of the bond can be calculated as follows:

Step 1

PV of interest payment

Semi-annual coupon rate = 5.72/2 = 2.86 %

Semi-annual Interest payment =( 2.86 %×$1000)= $28.6

Semi annual yield = 6.85%/2 = 3.42%

PV of interest payment  

= A ×(1- (1+r)^(-n))/r

A- interest payment, r- yield -3.42%, n- no of periods- 2 × 22 = 44 periods

= 28.6× (1-(1.0342)^(-44)/0.0342)= 645.82

 

Step 2  

PV of redemption value (RV)

PV = RV × (1+r)^(-n)

RV - redemption value- $1000, n- 7, r- 4.5%  

= 1,000 × (1+0.0342)^(-2×22)

= 1000 × 1.0342^(-44)= 227.7

Step 3

Price of bond = PV of interest payment + PV of RV

645.82 + 227.7= 873.525

Minimum number of units to be issued = $40 million/873.5= 45,791.4 units

 

Minimum number of units to be issued = 45,791.4 units

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2 years ago
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