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Question

Russell Container Corporation has a $1,000 par value bondoutstanding with 30 years to maturity. The bond carries an annualinterest payment of $120 and is currently selling for $820 perbond. Russell Corp. is in a 40 percent tax bracket. The firm wishesto 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 theyield to maturity on the old issue because the risk and maturitydate will be similar. a. Compute the yield to maturity on the oldissue and use this as the yield for the new issue

b.

Make the appropriate tax adjustment to determine the aftertaxcost of debt.

Solution

xYield xx xxxxxxxy(xxxxxxxx(x-xxx)+(xxxx Value- xxxx Marketvalue)/n)/(Maturity xxxxx+xxxxxx xxxxx)/xYield xx Maturity0.034615xYxxxx xx maturity(xxxxxxxx(x-xxx)+(xxxx Value- xxxx xxxxxxxxxxx)/x)/(xxxxxxxy xxxxx+xxxxxx Value)/2Yield xx xxxxxxxyx.xxxxxx

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