Question

Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 4 percent 3 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 22 percent.

Answer 1

Answer:

Pretax cost of debt = 3.48%

Aftertax cost of debt = 2.71%

Explanation:

Missing word "What is the pretax cost of debt and aftertax cost of debt"

Coupon rate = 4%

YTM = 22

Nper = YTM*2 = 44

PMT = 1000*4%/2 = 20

FV = 1000

PV = 1080

Rate = rate(nper, pmt, -pv, fv)

Rate = rate(44, 20, -1080, 1000)

Rate = 0.0174

Rate = 1.74%

Pretax cost of debt = Rate * 2

Pretax cost of debt = 1.74% * 2

Pretax cost of debt = 3.48%

Aftertax cost of debt = [3.48% * (1 - 0.22)]

Aftertax cost of debt = 3.48% * 0.78

Aftertax cost of debt = 0.0348 * 0.78

Aftertax cost of debt = 0.027144

Aftertax cost of debt = 2.71%