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14 July, 14:41

Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 3.56 percent, a par value of $1,000 per bond, matures in 5 years, has a total face value of $3.9 million, and is quoted at 106 percent of face value. The second issue has a coupon rate of 6.18 percent, a par value of $2,000 per bond, matures in 24 years, has a total face value of $8.2 million, and is quoted at 94 percent of face value. Both bonds pay interest semiannually. The company's tax rate is 40 percent. What is the firm's weighted average aftertax cost of debt?

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  1. 14 July, 15:34
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    The answer is 3.21%

    Explanation:

    Solution

    From the question given, we find the firm's average cost of debt weighted.

    Amount weight cost weight*cost

    Bond 1 4,134,000.0 0.3491 1.370% 0.0048

    Bond2 7,708,000.00 0.6509 4.011% 0.0261

    Therefore, he firm's weighted average after tax cost of debt is 3.21%
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