Question

Sheridan Ltd. has issued bonds that never require the principal amount to be repaid to investors. Correspondingly, Sheridan must make interest payments into the infinite future. If the bondholders receive annual payments of $91 and the current price of the bonds is $700.00 What is the pre-tax cost of this debt? (Round answer to 2 decimal places, s. 15.25%) Pre-tax cost of debt e Textbook and Media What is the after-tax cost of this debt for Sheridan if the form is in the 40 percent marginal tax rate?(Round intermediate calculations to 4 decimal places, s 1.2514 and final answer to 2 decimal places, s. 15.25%) Alter-tax cost of debt e Textbook and Media

Answer 1

The debt issued by Sheridan is irredeemable debt and the same can be calculated as follows:

Calculation of irredeemable debt:

The formula for calculating irredeemable debt is I/NP

Where, I = Interest payment

NP = Net proceeds from issue of bond,

Hence,

Cost of debt = I / NP

                    = $91 / $700 * 100

                    = 13%

Calculation of after tax cost of debt:

After tax debt = I / NP (1 -t)

                       = 13% (1 - 0.40)

                       = 13% * .6

                       = 7.8%