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Yield to maturity, aftertax cost of debt

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8. New Jersey Bell Telephone Co. is planning to issue debt that will mature in the year 2024. In many respects the issue is similar to currently outstanding debt of the corporation. Using Table 11-2 on page 304 (see attached file), identify:

a. The yield to maturity on similarly outstanding debt for the firm, in terms of maturity.

b. Assume that because the new debt will be issued at par, the required yield to maturity will be 0.15 percent higher than the value determined in part a. Add this factor to the answer in a. (New issues at par sometimes require a slightly higher yield than old issues that are trading below par. There is less leverage and there are fewer tax advantages.)

c. If the firm is in a 30 percent tax bracket, what is the aftertax cost of debt?

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Solution Summary

Identifies yield to maturity and calculates the aftertax cost of debt.

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a. The yield to maturity on similarly outstanding debt for the firm, in terms of maturity.

The yield to maturity of the bond maturing in 2024 for New Jersey Bell Telephone Co.= 8.36%
(According to the table)

Answer: 8.36%

b. Assume that ...

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