Question

The Ralston Road Warriors have issued four bonds which are listed in the following table. If the corporate tax rate is 33 percent, what is the company's after-tax cost of debt (NOTE: you don't need to convert rates from an APR to an EAR) (Do not round your intermediate calculations.)

Bond	Coupon Rate	Yield to Maturity	Price Quote (% of Face Value)	Maturity	Face Value
1	5.90%	5.59%	102%	8 years	$ 20,000,000
2	7.10%	5.77%	110%	10 years	$ 35,000,000
3	5.90%	5.66%	103%	22 years	$ 42,000,000
4	6.80%	5.69%	117%	36 years	$ 59,000,000

Answer 1

Bond	Yield to Maturity	Price Quote	Face Value	Market Value	Weight %
1	5.59%	102%	$20,000,000	$20,400,000	11.92%
2	5.77%	110%	$35,000,000	$38,500,000	22.49%
3	5.66%	103%	$42,000,000	$43,260,000	25.27%
4	5.69%	117%	$59,000,000	$69,030,000	40.32%
			Total	$171,190,000

Calculate the market value of each bond by multiplying price quote and face value. Compute weight of each bond using market values.

Pre-tax cost of debt = Sum of weight x YTM = 11.92% x 5.59% + 22.49% x 5.77% + 25.27% x 5.66% + 40.32% x 5.69% = 5.69%

After-tax cost of debt = 5.69% x (1 - 33%) = 3.81%