Russell Container Corporation has a RM1,000 par value bonds outstanding with 20 years to maturity. The bond carries an annual interest payment of RM95 and is currently selling for RM920 per bond. Russell Corp. is in a 25 percent tax bracket. The firm wishes to know the after-tax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. i. Compute the yield to maturity on the old issue and use this as the yield for the new issue. ii. Make the appropriate tax adjustment to determine the after-tax cost of debt.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Russell Container Corporation has a RM1,000 par
i. Compute the yield to maturity on the old issue and use this as the yield for the new issue.
ii. Make the appropriate tax adjustment to determine the after-tax cost of debt.
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