Question

Olympic Sports has two issues of debt outstanding. One is a 8% coupon bond with a face value of $36 million, a maturity of 15 years, and a yield to maturity of 9%. The coupons are paid annually. The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 9%. The face value of the issue is $41 million, and the issue sells for 95% of par value. The firm's tax rate is 40%.a. What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Before-tax cost of debt %b. What is Olympic's after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) After-tax cost of debt %

Answer 1

Before-tax cost of debt is 17.00%

After-tax cost of debt is 10.20%

Step-by-step explanation:

Before-tax cost of debt

Bond 1 = 8.00%

Bond 2= 9.00%

Total =17.00%

After-tax cost of debt

Bond 1 = 8.00%×(1-0.40) = 4.80%

Bond 2= 9.00%×(1-0.40) = 5.40%

Total = 10.20%