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 8 percent 3 years ago. The bond currently sells for 93 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.)

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

Jimmy's cricket Farm Bond Details Amt $ Assume the face value is =                     1,000 Market price @93% of face value =                         930 Years to Maturity                             22 Annual interest @8%=                           80 Yield To maturity formula=[Annual coupon+( Face value-Market price)/Yearsto maturity]/(Face value+2*Market price)/3 YTM =[80+(1000-930)/22/(1000+2*930)/3= YTM =8.73% a So Pre Tax cost of Bond =8.73% b Tax rate =35% So Post tax cost of Debt=8.73%*(1-35%)=5.67% So Post Tax cost of debt =5.67%

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