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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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    https://brainmass.com/business/bond-valuation/debt-for-olympic-sports-113919

    Solution Summary

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

    $2.19