Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual c

Question

Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 12 percent 3 years ago. The bond currently sells for 94 percent of its face value. The company’s tax rate is 35 percent.

What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 12 percent 3 years ago. The bond currently sells for 94 percent of its face value. The company’s tax rate is 35 percent.

Explanation / Answer

a. Maturity is 25,but its semiannual payments so N is 25*2 N 50 But 3 years are gone by so N is 22*2 = 44 N 44 Coupon 6 as its semiannual 12/2 Price 94 Face value 100 Yield 12.83% Current yield Pretax cost of debt is 12.83% b. Tax rate 35%,so pretax cost of debt*(1-tax rate) will give post tax cost of debt So we have 8.34%

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