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Company X has two bond issues outstanding
Company X has two bond issues outstanding. The information on these bonds is listed below. Both bonds pay coupons semiannually. What is the pre-tax cost of the company's debt? Bond Coupon Rate YTM Price Quote Time to Maturity Number of Bonds A 6.5% 4.45% 109.1 5 years 5,000 B 5.3% 5.71% 97.4 8 years 10,000
Expert Solution
Let's assume par value of the bond = $1000
Market value of bond A = 1000*109.1% = $1091
Total market value of bond A = number of bonds*market price
Market value = 5000*1091 = $5,454,984.82
Bond B:
Market value of bond B = 1000*97.4% = 974
Total market value = 10,000 * 974 = 9,740,000
Total A + B = 5454984.82 + 9,740,000
= $15,194,984.82
Weight of bond A = 5,454,984.82 / 15,194,984.82 = 0.359
Weight of bond B = 9,740,000 / 15,194,984.82 = 0.641
Pre tax cost = weighted average cost of both bonds
Cost = YTM
Pre tax cost = (0.359*4.45%) + (0.641*5.71%)
= 5.26%
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