Jiminy\'s Cricket Farm issued a 30-year, 7.4 percent semiannual bond 9 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 7.4 percent semiannual bond 9 years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 30 percent.

What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage 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 percentage rounded to 2 decimal places (e.g., 32.16).)

What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

interest rate on bond 7.4% bond discount 7% Total cost of debt 14% companys tax rate 30% After tax Total cost of debt 10% (14*.7) After tax cost of debt is more relevant as it takes into account the impact of tax , and arrives at the actual cost

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