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Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon rate of 6 percent 4 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 35 percent.
a. What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax cost of debt_______ %
b. What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt _______%
c. Which is more relevant, the pretax or the aftertax cost of debt?

Respuesta :

Answer:

1. 6.40%

2. 4.16%

3. After tax cost of debt

Explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.  

The NPER represents the time period.  

Given that,  

Present value = $1,000 × 95% = $950

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

PMT = 1,000 × 6% ÷ 2 = $30

NPER = 26 years × 2 = 52 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 6.40%

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

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

= 6.40% × ( 1 - 0.35)

= 4.16%

c. After tax cost of debt is more relevant as the  after tax cost of debt is less than the pre tax cost of debt

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