Jiminy's Cricket Farm issued a 20-year, 6 percent semiannual bond 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?
b. What is the aftertax cost of debt?
c. Which is more relevant, the pretax or the aftertax cost of debt?
Aftertax cost of debt
Pretax cost of debt
a. Cost of debt:-
=RATE(nper,pmt,pv,fv)
=RATE(18*2,6%/2*100,-92,100)*2
=6.78%
b. Cost of debt:-
=6.78%*(1-35%)
=4.40%
c. Aftertax cost of debt
Jiminy's Cricket Farm issued a 20-year, 6 percent semiannual bond 2 years ago
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