Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual c

Question

Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

a. 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.)

Pretax cost of debt % ?

b. 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.)

Aftertax cost of debt % ?

Explanation / Answer

Semiannual Coupon rate = 6%

Hence annual coupon rate = 12%

Bond sells at 92 % of its face value.

Hence pretax cost of debt = 12% / 92% = 13.04%

After tax cost of debt = (12% / 92%) *(1 - 0.35) = 8.48%

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