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Airborne Airlines Inc. has a $1,000 par value bond outstanding with 30 years to maturity. The...

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Accounting

Airborne Airlines Inc. has a $1,000 par value bond outstandingwith 30 years to maturity. The bond carries an annual interestpayment of $108 and is currently selling for $850. Airborne is in a20 percent tax bracket. The firm wishes to know what the aftertaxcost of a new bond issue is likely to be. The yield to maturity onthe new issue will be the same as the yield to maturity on the oldissue because the risk and maturity date will be similar.

a. Compute the yield to maturity on the oldissue and use this as the yield for the new issue. (Do notround intermediate calculations. Input your answer as a percentrounded to 2 decimal places.)
  


b. Make the appropriate tax adjustment todetermine the aftertax cost of debt.

Answer & Explanation Solved by verified expert
4.1 Ratings (814 Votes)
aThe yield to maturity on the old issue and use this as the yield for the new issue The Yield to maturity of YTM of the Bond is calculated using financial calculator as    See Answer
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Transcribed Image Text

Airborne Airlines Inc. has a $1,000 par value bond outstandingwith 30 years to maturity. The bond carries an annual interestpayment of $108 and is currently selling for $850. Airborne is in a20 percent tax bracket. The firm wishes to know what the aftertaxcost of a new bond issue is likely to be. The yield to maturity onthe new issue will be the same as the yield to maturity on the oldissue because the risk and maturity date will be similar.a. Compute the yield to maturity on the oldissue and use this as the yield for the new issue. (Do notround intermediate calculations. Input your answer as a percentrounded to 2 decimal places.)  b. Make the appropriate tax adjustment todetermine the aftertax cost of debt.

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