Jiminy’s Cricket Farm issued a bond with 18 years to maturity and a semiannual c

Question

Jiminy’s Cricket Farm issued a bond with 18 years to maturity and a semiannual coupon rate of 8 percent 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 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.)

Which is more relevant, the pretax or the aftertax cost of debt?

Jiminy’s Cricket Farm issued a bond with 18 years to maturity and a semiannual coupon rate of 8 percent 3 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

Explanation / Answer

Face value (FV) $                                  1,000.00 Coupon rate 8.00% Number of compounding periods per year 2 Interest per period (PMT)                                            40.00 Bond price (PV) $                                   (920.00) Number of years to maturity 15 Number of compounding periods till maturity (N) 30 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 8.98% (Pre-tax cost of debt) Bond Yield to maturity 5.84% (After-tax cost of debt) 8.98%*(1-35%) After tax cost of debt is more relavant

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