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Debt for Olympic Sports

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Olympic Sports has two issues of debt outstanding. One is a 9 percent coupon bond with a face value of $20 million, a maturity of 10 years, and a yield to maturity of 10 percent. The coupons are paid annually.
The other bond issue has a maturity of 15 years, with coupons also paid annually, and a coupon rate of 10 percent. The face value of the issue is $25 million, and the issue sells for 92.8 percent of par value. The firm's tax rate is 35 percent.

a. What is the before-tax cost of debt for Olympic?

b. What is Olympic's after-tax cost of debt?

Solution

Problem 11-14
Instructions

Use the MS Excel PV function to calculate Bond 1 present value and use the RATE function to calculate the
yield to maturity for Bond 2. For all other unknowns, use formulas.

a. What is the before-tax cost of debt for Olympic?

Assumptions
Bond 1 Bond 2
Years till maturity 10 Years till maturity 15
Yield to maturity 10% Yield to maturity FORMULA
Coupon payments $90 Coupon payments $100
Face Value $1,000 Face Value $1,000
Present Value FORMULA Present Value $928.00
Market Value $0 Market Value $23,200,000

Weighted Average Cost Cost of
Proportions Yield to Maturity Capital
Bond 1 FORMULA 10% 0.00%
Bond 2 FORMULA 0.00%
0.00%
b. What is Olympic's after-tax cost of debt?

Tax Rate 35%
After tax cost of debt FORMULA

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Solution Summary

The solution discusses dealing with Olympic Sports' debt through coupon bonds, etc.

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