Jeffs Cricket Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The

Question

Jeffs Cricket Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The bond currently sells for 91.5 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 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

What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places

Explanation / Answer

Face value is 100 ( Sale price 91.50 )

The pretax cost of debt = I/P0

                                      = (100*8%)/91.50

                                      = 0.0874

                                      = 8.74%

The after tax cost of debt = I(1-t)/P0

                                      = (100*8%)(1-0.35)/91.50

                                      = 0.0568

                                      = 5.68%

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