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What is the before-tax cost of debt for olympic

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Reference no: EM132804209

1. Olympic Sports has two issues of debt outstanding. One is a 9% coupon bond with a face value of $20M, a maturity of 10 years, and a yield to maturity of 10%. 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%. The face value of the issue is $25M, and the issue sells for 94% of par value. The firm's tax rate is 21%.

a. The yield to maturity of the second bond issue is 10.84%. How would you find this value?

Financial Calculator

CF0 = -$25M * 94% = -$23.5 Enter the face value as negative and multiply by % of par.

CF1-14 = $25M * 10% = $2.5M Through years 1-14 multiply face value by coupon rate

CF15 = (25M * 10%) + $25M = $27.5M Bond matures year 15 so add $25m to return

Solve IRR = 10.84%

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

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

Reference no: EM132804209

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