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3 October, 08:21

Jiminy's Cricket Farm issued a 30 year, 8%, semi-annual bond 3 years ago. The bond currently sells for 93% of its face value. The company's tax rate is 35%. (Hint: Notice that the bonds were issued 3 years ago and be sure to take that into account when calculating years to maturity). • What is the pretax cost of debt? • What is the after tax cost of debt?

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  1. 3 October, 08:52
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    The pretax cost of debt = 8.68%

    The after tax cost of debt=5.65%

    Explanation:

    N=30-3

    N=27*2

    N=54

    PV=-930

    Pmt=80/2

    =40

    FV = 1000

    I/Y=4.34%

    Coupon = 1000*0.08

    = 80

    YTM = 4.34*2

    = 8.68%

    The pretax cost of debt = 8.68%

    To find the after tax cost of debt=?

    After tax cost of debt=1-tax rate

    = 1-0.35

    = 0.65

    YTM (1-tax rate) = 8.69 (0.65)

    = 5.65%

    The after tax cost of debt=5.65%
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