Question

Formorian Inc. has two issued bonds (bond A and bond B) as part of its debt portfolio. Bond Alpha is a 4% semi-annual coupon bond with a current price of $903.97. Bond Gamma is a zero annual coupon bond with a current price of $345.03. Formorian has issued 14,000 A bonds that will mature in 8 years. 25,500 Gamma Bonds have been issued with 18 years left until maturity. Given this protfolio and a coprorate tax rate of 34%, what is Formorian's Cost of Debt Capital? RID) 7.65% R(D) 3.63% R(D) 2.83% R(D) 4.02% R(D) 3.79%

Answer 1

D2 X V fi =+C2/$C$8 - А в Ε D Market value weights 0.5899 Book value $ 14,000,000 Alpha Weighted cost (WeightxCost%) 2.14% $ Market value 12,655,580 =14000*903.97 2 3 Before tax cost 3.63% =RATE(8*2,40/2,-903.97,1000)*2*(1-34%) $ 25,500,000 $ 0.4101 1.65% 5 Gamma 6 8,798,265 =25500*345.03 4.02% =RATE(18,0,-345.03,1000)*(1-34%) 8 Total $ 39,500,000 $ 21,453,845 1.0000 After-tax cost of debt 3.79%

*Please rate thumbs up