Question

A company is trying to estimate the cost of debt for a new project. For their estimate, they will find the yield to maturity on existing company bonds. They have one outstanding bond issue at the moment that will mature in 15.00 years. The bond pays an annual coupon of 9.00%, with a face value of $1,000. The bond currently trades at 91.00% of face value. What is the yield to maturity on the existing debt? Submit Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924)) unanswered not_submitted

#2 Johnson and Johnson is trying to determine the cost of debt for a new capital budgeting project. Currently, Johnson and Johnson has a AAA credit rating from Moody’s. An analyst for Johnson decides to look at the AAA yield curve to determine the cost of debt. The project is expected to last for 10 years, so the analyst wants to find the yield to maturity for 10-year AAA bonds. The marginal tax rate for Johnson is 32.00%. TIME UNTIL MATURITY YIELD TO MATURITY 1 years 3.97% 5 years 4.47% 10 years 4.72% 15 years 4.97% Based on the yield curve, what is the cost of debt for the new project? Submit Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

Answer 1

1: Using financial calculator

Input:FV=1000, N=15

PMT=9%*1000=90

PV=91%*1000= -910

Solve for I/Y as 10.2

YTM of debt = 10.2%

2: YTM of 10 year bond = 4.72%

Cost of debt = YTM*(1-tax) = 4.72%*(1-32%)

= 3.21%