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.

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.)

*The answer is not 6.55%

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.

Explanation / Answer

Pretax cost of debt= rate(nper,pmt,pv,fv)*2

Nper (indicates the semi annual period) = (25-2)*2 = 46

PV (indicates the price) = 92%*1000 = 920

PMT (indicate the semi annual payment) = 1000*6%*1/2 = 30

FV (indicates the face value) = 1000

Rate (indicates YTM) = ?

Pretax cost of debt= rate( 46,30,-920,1000)*2

Pretax cost of debt= 6.69%

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