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Airborne Airlines Incorporated has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $102 and is currently selling for $880. Airborne is in a 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. 1. Compute the yield to maturity on the old issue and use this as the yield for the new issue. 2. Make the appropriate tax adjustment to determine the aftertax cost of debt. Note: Input your answer as a percent rounded to 2 decimal places.

Airborne Airlines Incorporated has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $102 and is currently selling for $880. Airborne is in a 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. 1. Compute the yield to maturity on the old issue and use this as the yield for the new issue. 2. Make the appropriate tax adjustment to determine the aftertax cost of debt. Note: Input your answer as a percent rounded to 2 decimal places.

Financial Accounting: The Impact on Decision Makers
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter10: Long-term Liabilities
Section: Chapter Questions
Problem 10.4E
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11:39 PM Sun 4 Dec = image ✓ Airborne Airlines Incorporated has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $102 and is currently selling for $880. Airborne is in a 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. 1. Compute the yield to maturity on the old issue and use this as the yield for the new issue. 2. Make the appropriate tax adjustment to determine the aftertax cost of debt. Note: Input your answer as a percent rounded to 2 decimal places. Question 5 Terrier Company is in a 45 percent tax bracket and has a bond outstanding that yields 11 percent to maturity. 1. What is Terrier's after-tax cost of debt? 2. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax rate falls to 30 percent. What is Terrier's new aftertax cost of debt? Note: Input your answer as a percent rounded to 2 decimal places. € 49% Done
Transcribed Image Text:11:39 PM Sun 4 Dec = image ✓ Airborne Airlines Incorporated has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $102 and is currently selling for $880. Airborne is in a 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. 1. Compute the yield to maturity on the old issue and use this as the yield for the new issue. 2. Make the appropriate tax adjustment to determine the aftertax cost of debt. Note: Input your answer as a percent rounded to 2 decimal places. Question 5 Terrier Company is in a 45 percent tax bracket and has a bond outstanding that yields 11 percent to maturity. 1. What is Terrier's after-tax cost of debt? 2. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax rate falls to 30 percent. What is Terrier's new aftertax cost of debt? Note: Input your answer as a percent rounded to 2 decimal places. € 49% Done
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