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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