Question

Jiminy's Cricket Farm issued a 30-year, 6 percent s annual bond currently sells for 93 percent of its face value. T 22 percent. inree years ago. The o mpany's tax rate is a. What is the 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 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.) 6.47 Pretax cost of debt Aftertax cost of debt b. c. Which is more relevant, the pretax or the aftertax cost of debt?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

$1,000.00 6% Bond par value Coupon rate Coupon frequency Years until maturity Current Price of bond 2 27 $930.00 YTM (semi-annual) 3.40% 10 a. Pretax Cost of Debt 6.92% Tax rate 22% 12 13 After tax cost of Debt T 5 .39% 14 b. 15 16 17 c. 18 19 20 More relevant Aftertax cost of Debt

Cell reference -

А B 1000 0.06 co von AwN- Bond par value Coupon rate Coupon frequency Years until maturity Current Price of bond =30-3 =C2*93% YTM (semi-annual) =RATE(C5,-C3/2*C2,C6,-C2,0) =(1+C8)^2-1 0.22 =C10*(1-C12) 10 a. Pretax Cost of Debt 11 12 Tax rate 13 14 b. After tax cost of Debt 15 16 17 c. More relevant 18 19 20 Aftertax cost of Debt

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