Jimmy\'s Cricket Farm issued a 30-year, 8.6 percent semiannual bond 6 years ago.

Question

Jimmy's Cricket Farm issued a 30-year, 8.6 percent semiannual bond 6 years ago. The bond currently sells for 90 percent of its face value. The company's tax rate is 38 percent. Required: What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places. What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places Which is more relevant, the pretax or the aftertax cost of debt?

Explanation / Answer

Post tax rate:-

Pre tax Cost of Debt Interest per annum 8.6 Half year rate of interest 4.3 Effective rate of interest 8.7849 (1+R)^n-1= (1+0.043)^2-1*100 Present value of Bond 90% Cost of Debt(8.78/90%)-Pre tax                      9.76

Post tax rate:-

Tax rate 38% Cost of Debt post tax 9.76*(1-.38)                      6.05 ** Post tax Cost of debt is more relevant as it considers the tax saving in interest.

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