Jiminy’s Cricket Farm issued a 30-year, 6 percent semiannual bond 3 years ago. T

Question

Jiminy’s Cricket Farm issued a 30-year, 6 percent semiannual bond 3 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? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16))

What is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Jiminy’s Cricket Farm issued a 30-year, 6 percent semiannual bond 3 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

Explanation / Answer

K =Nx2         
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^(Nx2)
                   k=1

                    K= (30-3)x2          
920 = [(6*1000/(100*2))/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^(30-3)x2
                   k=1

pretax cost of debt(YTM) = 6.92%

aftertax cost of debt =  pretax cost of debt*(1-tax rate) = 6.92*(1-.35) = 4.50%

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