Jiminy’s Cricket Farm issued a bond with 15 years to maturity and a semiannual c

Question

Jiminy’s Cricket Farm issued a bond with 15 years to maturity and a semiannual coupon rate of 8 percent 3 years ago. The bond currently sells for 96 percent of its face value. The company’s tax rate is 35 percent. a. 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.) Pretax cost of debt % b. 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.)

Explanation / Answer

YTM will be the cost of debt before taxes for that we will use financial calculator

PV=-96%*1000=-960

N=12*2=24 PERIODS AS ONLY 12 YEARS LEFT

PMT=8%*1000/2=40

FV=1000 AS PAR VALUE OR FUTURE VALUES

CLICK CPT

PRESS 1/Y=4.2696%*2=8.5393% IS YTM

COST OF DEBT = 8.54%

AFTER TAX COST OF DEBT = 8.54%*0.65=5.55%

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