Ying Import has several bond issues outstanding each making

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below Price Quote 105.8 94.6 104.6 106.5 Maturity 4 years 7 years 14.5 years 24 years Face Value $28,000,000 48,000,000 53,000,000 68,000,000 Bond Coupon Rate 8.80% 7.00 8.50 9.00 Required: What is the market value of each of the company\'s bonds? (Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) Bond Market value 4 What is the market value weight of each of the company\'s bonds? (Round your answers to 4 decimal places (e.g., 32.1616) Bond Weight 2 4 What is the YTM of each of the company\'s bonds? (Input your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Bond 4 If the corporate tax rate is 40 percent, what is the aftertax cost of the company\'s debt? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Aftertax cost of debt

Solution

1)

Market value of bond 1 = 105.8% of 28,000,000 = $29,624,000

Market value of bond 2 = 94.6% of 48,000,000 = $45,408,000

Market value of bond 3 = 104.6% of 53,000,000 = $55,438,000

Market value of bond 4 = 106.5% of 68,000,000 = $72,420,000

2)

Total market value of bond = 29,624,000 + 45,408,000 + 55,438,000 + 72,420,000 = 202,890,000

Weight of bond 1 = 29,624,000 / 202,890,000 = 0.1460

Weight of bond 2 = 45,408,000 / 202,890,000 = 0.2238

Weight of bond 3 = 55,438,000 / 202,890,000 = 0.2732

Weight of bond 4 = 72,420,000 / 202,890,000 = 0.3569

3)

Coupon payment = 0.088 * 28,000,000 = 2,464,000 / 2 = 1,232,000

Number of periods = 4 * 2 = 8

YTM of bond 1 using a financial calculator = 7.11%

Keys to use in a financial calculator: 2nd I/Y 2, PV = -29,624,000, FV = 28,000,000, N = 8, PMT = 1,232,000, CPT I/Y

Coupon payment = 0.07 * 48,000,000 = 3,360,000 / 2 = 1,680,000

Number of periods = 7 * 2 = 14

YTM of bond 2 using a financial calculator = 8.02%

Keys to use in a financial calculator: 2nd I/Y 2, PV = -45,408,000, FV = 48,000,000, N = 14, PMT = 1,680,000, CPT I/Y

Coupon payment = 0.085 * 53,000,000 = 4,505,000 / 2 = 2,252,500

Number of periods = 14.5 * 2 = 29

YTM of bond 3 using a financial calculator = 7.96%

Keys to use in a financial calculator: 2nd I/Y 2, PV = -55,438,000, FV = 53,000,000, N = 29, PMT = 2,252,500, CPT I/Y

Coupon payment = 0.09 * 68,000,000 = 6,120,000 / 2 = 3,060,000

Number of periods = 24 * 2 = 48

YTM of bond 4 using a financial calculator = 8.37%

Keys to use in a financial calculator: 2nd I/Y 2, PV = -72,420,000, FV = 68,000,000, N = 48, PMT = 3,060,000, CPT I/Y

4)

Average before tax cost of debt = ( 0.0837 + 0.0796 + 0.0802 + 0.0711) / 4

Average before tax cost of debt = 0.07865

After tax cost of debt = 0.07865 ( 1 - 0.4)

After tax cost of debt = 0.04719 or 4.72%