Jiminy's Cricket Farm just issued a 20-year, 7 percent, semiannual bond. The bond currently sells for...
Jiminy's Cricket Farm just issued a 20-year, 7 percent, semiannual bond. The bond currently sells for 108 percent of its face value. What is the company’s pretax cost of debt? What is the company’s aftertax cost of debt if the tax rate is 23 percent?
Pretax cost of debt 6.29%
Aftertax cost of debt 4.84%
Please check the answers and show all work typed out. No excel or grid style please as I am on mobile.
Homework Answers
| Maturity Value of bonds | 1000 | ||||
| Semi annual cash interest (1000*7%*6/12) | 35 | ||||
| PVf at 3.145% for 40th period | 0.289783 | ||||
| Annuity PVF at 3.145% for 40 periods | 22.58242 | ||||
| Present value of Maturity value | 289.783 | ||||
| Present value of Interest payments | 790.3847 | ||||
| Issue price | 1080.168 | ||||
| hence, Annual cost of debt = 3.145*2= 6.29% | |||||
| Pre-tax cost of debt = 6.29% | |||||
| After tax cost of debt = Pre-tax cost of debt (1-Tax rate) | |||||
| 6.29% (1-0.23) = 4.84% | |||||
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