Jiminy\'s Cricket Farm issued a 30-year, 8.8 percent semiannual bond 5 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 8.8 percent semiannual bond 5 years ago. The bond currently sells for 89.5 percent of its face value. The company’s tax rate is 40 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).)

Jiminy's Cricket Farm issued a 30-year, 8.8 percent semiannual bond 5 years ago. The bond currently sells for 89.5 percent of its face value. The company’s tax rate is 40 percent.

Explanation / Answer

Answer:a

895=44*PVIFA(y,50)+$1000*PVIF(y,50)

Y=4.97

Y=9.95% (Annually)

.

Cost of debt before tax =9.95%

Answer:b Since interest expense is tax deductible.

Cost of debt after tax -=9.95%(1-0.40)=5.97%

Answer:c After tax cost is more relevant as you need an after tax discount rate to discount after tax cash flows.

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