Question

KeySpan Corp. is planning to issue debt that will mature in 2035. In many respects, the issue is similar to currently outstanding debt of the corporation. a. Using Table 11-3, identify the yield to maturity on similarly outstanding debt for the firm in terms of maturity. b. Assume that because the new debt will be issued at par, the required yield to maturity will be 0.15 percent higher than the value determined in part a. Add this factor to the answer in a. (New issues sold at par sometimes requirea slightly higher yield than older seasoned issues because there are fewer tax advantages and more financial leverage that increase company risk.) c. If the firm is in a 30 percent tax bracket, what is the aftertax cost of debt?

Short answer

1. Yield to maturity is 4.32%
2. Yield to maturity is 4.47%
3. Cost of debt is 3.13%

Step-by-step solution

a. Yield to maturity 

Using Table showing Excerpt from S&P capital IQ net advantage, 4.32% the yield to maturity on similarly outstanding debt for the KeySpan corporation in terms of maturity.

b. new yield to maturity calculation

The required yield to maturity will be 0.15 percent higher than the value determined in part a. that is 4.32%. So the new yield to maturity is;

$$\begin{gathered} 4.32+0.15 \\ =4.47\% \end{gathered}$$

c. cost of debt calculation

$\begin{array}{rcl}\mathrm{Kd}\left(\mathrm{Cost}\mathrm{of}\mathrm{debt}\right)& =& \mathrm{Yield}\left(1-\mathrm{Tax}\mathrm{Rate}\right)\\ & =& 4.47\times \left(1-30\%\right)\\ & =& 4.47\times 0.70\\ & =& 3.13\%\end{array}$

the aftertax cost of debt is 3.13% for the firm.