Question

Fanny’s Farm issued a 20-year, 4.5 percent semiannual bond two years ago. The bond currently sells for 96 percent of its face value. The company’s tax rate is 21 percent.

a.         What is the pretax cost of debt?

b.         What is the after-tax cost of debt?

c.         Which is more relevant, the pretax or the after-tax cost of debt? Why?

Please complete the work in Excel, thank you :)

Answer 1

H24 for =RATE(H14, H16,-H20, H18)*2 YTM Semi Annually: COUPON RATE 4.50% YEARS TO MATURITY NPER 36 (years to maturity x 2) PMT 22.5 (face value x coupon rate)/2 FACE VALUE $ 1,000.00 PRICE = PV = $960.00 RATE = 2.42% RATE(36,22.5,-960,1000) 4.84% RATE(36,22.5,-960,1000)*2 YTM = RATE X 2 = RATE(NPER,PMT,-PV,FV) a Pre Tax Cost Of Debt 4.84% b After Tax Cost Of Debt YTM*(1-Tax Rate) 0.0484* (1-0.21) 0.038198846 3.82% c After Tax Cost Of Debt is more relavant