Jiminy’s Cricket Farm issued a bond with 10 years to maturity and a semiannual c

Question

Jiminy’s Cricket Farm issued a bond with 10 years to maturity and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 95 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 10 years to maturity and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 35 percent.

Explanation / Answer

Jimmy's Cricket team YTM formula = {Interest payment+(Face value-Market price)/Years to maturity}/(face value+2*market price)/3 Details Face value assumed                   1,000 Market Price                       950 Annual Interest                         60 Years to maturity                            8 Ytm = [60+(1000-950)/8]/[(1000+950*2)/3                       =66.25/966.67             = 6.85% So YTM is 6.85% Therefore approx pretax cost of debt is 6.85% Tax rate is 35% Post Tax cost of debt is =6.85%*0.65= 4.45%

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