Jimmys Cricket Farm issued a 10-year, 8 percent semiannual bond 3 years ago. The

Question

Jimmys Cricket Farm issued a 10-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 96 percent of its face value. The companys tax rate is 35 percent.

What is the pretax cost of debt?

What is the aftertax cost of debt?

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Question2.

A stock has an expected return of 12.5 percent, its beta is 1.35, and the risk-free rate is 5.5 percent. What must the expected return on the market be?

Market expected return?______

What is the pretax cost of debt?

What is the aftertax cost of debt?

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Question2.

A stock has an expected return of 12.5 percent, its beta is 1.35, and the risk-free rate is 5.5 percent. What must the expected return on the market be?

Market expected return?______

Explanation / Answer

Using a TI BAII financial calculator we find the YTM (Yield to Maturity) is 8.6%.Thie is the pretax cost. The after tax is 8.6(1-.35)= 5.59%.

12.5= 5.5 +1.35(Rm-5.5)

Solving for Rm we get 10.685%

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