Vandelay Industries Has Two Issues of Debt

question 114

Multiple Choice

Vandelay Industries has two issues of debt.Issue A has a maturity value of 8 million dollars, a coupon rate of 8%, paid annually, and is selling at par.Issue B was issued as a 15-year bond five years ago.Its coupon rate is 9%, paid annually.Investors demand a pre-tax return of 9.3% on this bond.The maturity value of Issue B is 6 million dollars.The Vandelay company has a marginal tax rate of 35%.What is the company's after tax cost of debt?

• A)4.73%
• B)5.56%
• C)7.36%
• D)8.47%

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Definitions:

Coniferous Forest

A type of biome characterized by evergreen trees that have needles and produce cones, typically found in northern latitudes.

West Coast

A term often used to refer to the western coastal areas of a continent, particularly the western coast of the United States.

Subsoil

The layer of soil lying immediately under the topsoil, often richer in minerals but poorer in organic material, and critical for water drainage and aeration.

Tundra

A biome characterized by cold temperatures, low precipitation, a short growing season, and a lack of trees, found in high latitudes and atop mountains.