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# Airborne Airlines, Inc. and Hamilton Corp.

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Solve problem number 7 and 20

Chapter 11. Problem 7 and 20
Approximately yield to maturity and the cost of debt :

Problem 7
Airborne Airlines, Inc. has a \$1,000 par value bond outstanding with 25 years to maturity. The bond carries an annual interest payment of \$78 and is currently selling for \$875. Airborne is in the 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar.

a) Compute the approximate yield maturity (Formula 11 - 1 on page 329) on the old issue and use this as the yield for the new issue.

b) Make the appropriate tax adjustment to determine the after tax cost of debt.

20. Given the following information, calculate the weighted average cost of capital for Hamilton Corp. Line up the calculations in the order shown in Table 11-1.

Percent of capital structure:
Debt 30%
Preferred stock 15
Common equity 55

Bond coupon rate 13%
Bond yield to maturity 11%
Dividend, expected common \$3.00
Dividend, preferred \$10.00
Price, common \$50.00
Price, preferred \$98.00
Flotation cost, preferred \$5.50
Growth rate 8%
Corporate tax rate 30%

#### Solution Preview

Chapter 11. Problem 7 and 20
Approximately yield to maturity and the cost of debt :

Problem 7
Airborne Airlines, Inc. has a \$1,000 par value bond outstanding with 25 years to maturity. The bond carries an annual interest payment of \$78 and is currently selling for \$875. Airborne is in the 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar.

a) Compute the approximate ...

#### Solution Summary

This solution is comprised of a detailed explanation to compute the approximate yield maturity (Formula 11 - 1 on page 329) on the old issue and use this as the yield for the new issue.

\$2.19