Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago.

Question

Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.

a) What is the pre-taxed cost of debt? (2 points)

b) What is the after tax cost of debt? (2 points)

c) Which is more relevant, the pre-tax or the after- tax cost of debt? Why?

In question 4 above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par.

d) What is the company’s total book value of debt? (3 points)

e) The total market value? (2 points)

f) What is your best estimate of the after-tax cost of debt now?

Explanation / Answer

use rate formaule in excel to find the cost of debt

=rate(nper,pmt,pv,fv,type)

=rate((30-3)*2,((8%/2)*100,-93,100,0)

=4.34%

yearly it is 4.34%*2=8.68%

b)After tax cost of debt= before tax*(10tax)

=8.68%*(1-35%)=5.64%

c)After tax cost of debt since while calculating cost of capital after tax cost of debt is used

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