(all other answers on chegg are incorrect) Jiminy’s Cricket Farm issued a bond w

Question

(all other answers on chegg are incorrect)
Jiminy’s Cricket Farm issued a bond with 10 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

Cost of Debt(rd) = Annual Interest Payment/Market Value of Debt

Annual Interest Payment = 1000*8/100 = 80

Market Value of Debt = 960

Cost of Debt = 80/960 = 8.3% per annum

Semiannual payment is 40/960 = 4.16%

After-Tax Cost of Debt = rd (rd × T) = rd × (1 T)

                                          = 8.3%(1-35%)

                                         = 0.083(0.65) = 0.05395 or 5.4%

Pre-tax cost of debt = After-tax cost of debt/(1- tax rate)

                                   = 5.4%/(1-35%) =0.054/0.65 = 8.3%

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