Question

Jiminy's Cricket Farm issued a 30-year, 5 percent semiannual coupon bond 3 years ago. The bond currently sells for 94 percent of its face value. The company's tax rate is 22 percent. a. What is the company's pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company's aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax cost of debt Aftertax cost of debt b.

Answer 1

1)

Assuming face value to be $1,000

Coupon = (0.05 * 1000) / 2 = 25

Number of periods = (30 - 3) * 2 = 54

Price = 94% of 1000 = 940

Pre tax cost of debt = 5.43%

Keys to use in a financial calculator:

2nd I/Y 2

FV 1000

PV -940

PMT 25

N 54

CPT I/Y

2)

After tax cost of debt = 0.0543 (1 - 0.22)

After tax cost of debt = 0.0424 or 4.24%