Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 3.56 percent, a par value of $1,000 per bond, matures in 5 years, has a total face value of $3.9 million, and is quoted at 106 percent of face value. The second issue has a coupon rate of 6.18 percent, a par value of $2,000 per bond, matures in 24 years, has a total face value of $8.2 million, and is quoted at 94 percent of face value. Both bonds pay interest semiannually. The company's tax rate is 40 percent. What is the firm's weighted average aftertax cost of debt?

Question

Business

Naomi Hurley

12 August, 12:36

Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 3.56 percent, a par value of $1,000 per bond, matures in 5 years, has a total face value of $3.9 million, and is quoted at 106 percent of face value. The second issue has a coupon rate of 6.18 percent, a par value of $2,000 per bond, matures in 24 years, has a total face value of $8.2 million, and is quoted at 94 percent of face value. Both bonds pay interest semiannually. The company's tax rate is 40 percent. What is the firm's weighted average aftertax cost of debt?

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Answers (1)

Know the Answer?

Lauren Oliver · Answer 1

The answer is 3.21%

Explanation:

Solution

From the question given, we find the firm's average cost of debt weighted.

Amount weight cost weight*cost

Bond 1 4,134,000.0 0.3491 1.370% 0.0048

Bond2 7,708,000.00 0.6509 4.011% 0.0261

Therefore, he firm's weighted average after tax cost of debt is 3.21%