Problem 4.4. Emblematic Enterprises has $80 million worth of outstanding Series A bonds, yielding 7% per year, and $200 million worth of Series B bonds, yielding 6.5% per year. It also has $100 million worth of outstanding commercial paper, yielding 4% per year. All payments are made annually. The tax rate is 35%.

a. Calculate Emblematic's Value of Debt and Return on Debt.

b. The Series A bonds have a coupon rate of 5.5% and mature in four years, at which point they will be retired. Calculate the face value of these securities and the value of ITS (interest tax shield) generated by them.

c. Suppose that the coupon rates on Series B bonds and commercial paper are equal to their yields. Moreover, the face values of these securities will grow at 2% per year for the indefinite future. Calculate the value of ITS (interest tax shield) generated by these securities. What will Emblematic's Value of Debt and Return on Debt be at year 4?

d. Now suppose that Emblematic plans to issue $30 million worth of new Series C bonds two years from now. These bonds will have a coupon rate and yield of 6.7%, and their face value will grow at 2% per year in the following years. Calculate the current market value of ITS (interest tax shield) from these securities. How do the Value of Debt and Return on Debt change? Finally, calculate the value and OCC (opportunity cost of capital) of Emblematic's portfolio of ITS (interest tax shields).

The answers are:

a. D₀ = 380.0000; r_D = 0.0595

b. F₀¹ = 84.2822; V¹_ITS,₀ = 5.4955

c. V²_ITS,0 = 101.1111; V³_ITS,0 = 70.0000; D₄ = 324.7296; r_D4 = 0.0567

d. V⁴_ITS,0 = 13.1473; D₀ and r_D unchanged; V_ITS,0 = 189.7540; r_ITS = 0.0561

How do I obtain these answers?