Calculate the approximate yield to maturity

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Airborne Airlines, Inc., has outstanding bonds with a par value of $ 1,000 and 25 years to maturity. The bonds offer an annual payment of $ 78 in interest and currently sell for $ 875. Airborne is in the 30% tax bracket. The company wants to know what the likely after-tax cost of a new bond issue would be. The yield to maturity on the new issue will be the same as the yield at maturity on the old issue because the risk and the maturity date will be similar.

a) Calculate the approximate yield to maturity (formula 11-1) on the anti-issue issue. Guide and use the result as the yield for the new issue.

b) Make the appropriate fiscal adjustments to determine the cost of debt after taxes.

 

 

Reference no: EM133110184

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