Question

Olympic Sports has two issues of debt outstanding. One is a 9% coupon bond with a face value of $20 million, a maturity of 10 years, and a yield to maturity of 10%. 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 10%. The face value of the issue is $25 million, and the issue sells for 94% of par value. The firm's tax rate is 35%. a. What is the before-tax cost of debt for Olympic? b. What is Olympic's after-tax cost of debt?f

Answer 1

Calculate before and after tax cost of debt as follows:

А 290 291 292 293 294 295 B Particulars Coupon rate Face value Maturity YTM Present value Tax rate D First debt Second debt 9% 10% 20000000 25000000 15 10% $23,500,000.00 35% 35% 296 297 298 $18,771,086.58 299 Present value YTM 10.826% 300 Particulars First debt Second debt 301 302 303 304 305 306 Market value Weight Rate Weigthed rate $18,771,086.58 0.444064444 10.00% 4.44064% $23,500,000.00 0.555935556 10.826% 6.01879% $42,271,086.58 Before tax cost of debt 10.46% After tax cost of debt 6.80%

Formulas:

Second debt 0.1 ДА В 290 Particulars 291 Coupon rate 292 Face value 293 Maturity 294 YTM 2951 Present value 296 Tax rate First debt 0.09 =20*1000000 10 =25*1000000 15 =D292 94% 0.35 0.35 297 298 =PV(C294,C293,-C292*C291,-C292) Present value YTM 299 =RATE(D293,-D292 D291,D295,-D292) 300 301 302 303 304 Particulars First debt Second debt Rate Weigthed rate =C294 =D302*E302 =D299 =D303*E303 Market value Weight =C298 =C302/C304 =D295 =C303/C304 =SUM(C302:C303) Before tax cost of debt After tax cost of debt 305 =SUM(F302:F304) =E305*(1-D296) 306