Question

Jimmy’s Cricket Farm issued a 30-year, 10 % semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35%. • What is the pretax cost of debt? • What is the after-tax cost of debt?

Answer 1

Answer:

9.16% and 5.95%

Explanation:

The attachment is shown below:

Given that,  

Present value = 108% × $1,000 = $1,080

Assuming figure - Future value or Face value = $1,000  

PMT = 1,000 × 10% ÷ 2 = $50

NPER = 30 years  - 7 years × 2 = 46 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this,  

1. The pretax cost of debt is 9.16%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 9.16% × ( 1 - 0.35)

= 5.95%