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3. Kemp Industries has the following issues outstanding: Senior bonds Subordinated bonds Market value $30 million $30 million Maturity value $34 million $30 million Yield-to-maturity

3. Kemp Industries has the following issues outstanding: Senior bonds Subordinated bonds Market value $30 million $30 million Maturity value $34 million $30 million Yield-to-maturity 12% 15% Coupon rate 10% 15%

a. What is the before-tax interest cost to the firm of each of the two types of debt issues?

b. What is the average rate on the bonds?

c. Assuming a 26 percent tax rate, what after-tax debt rate should be used in the WACC calculation?

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