Jiminy’s Cricket Farm issued a bond with 10 years to maturity and a semiannual c

Question

Jiminy’s Cricket Farm issued a bond with 10 years to maturity and a semiannual coupon rate of 10 percent 4 years ago. The bond currently sells for 94 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

%

Jiminy’s Cricket Farm issued a bond with 10 years to maturity and a semiannual coupon rate of 10 percent 4 years ago. The bond currently sells for 94 percent of its face value. The company’s tax rate is 35 percent.

Explanation / Answer

Rate function in Excel =RATE(40,50,-940,1000) =5.37% its semiannual so   1) 10.74% = pretax cost of debt 2) =(0.1074)*(1-0.35) =6.981% = aftertax cost of debt

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