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 6 percent 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

What is the pretax cost of debt?

What is the aftertax cost of debt?

Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

What is the pretax cost of debt?

Explanation / Answer

Answer:a Calculation of Pretax cost of Debt

(1000*92%)=($1000*6%*1/2)*PVIFA(R%,46)+$1000*PVIF(R%,46)

$920=$30*PVIFA(R%,46)+$1000*PVIF(R%,46)

R=3.34% SEMIANNUALLY

R=3.34%*2=6.68% per year

Answer:b After tax cost of Debt=6.68%(1-0.35)

=4.342%

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