Jiminy\'s Cricket Farm issued a 30-year, 6 percent, semiannual bond 8 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 6 percent, semiannual bond 8 years ago. The bond currently sells for 97 percent of its face value. What is the after-tax cost of debt if the company's tax rate is 32 percent? Answer
4.00 percent 4.25 percent 4.70 percent 5.75 percent 6.25 percent Jiminy's Cricket Farm issued a 30-year, 6 percent, semiannual bond 8 years ago. The bond currently sells for 97 percent of its face value. What is the after-tax cost of debt if the company's tax rate is 32 percent? Jiminy's Cricket Farm issued a 30-year, 6 percent, semiannual bond 8 years ago. The bond currently sells for 97 percent of its face value. What is the after-tax cost of debt if the company's tax rate is 32 percent? 4.00 percent 4.25 percent 4.70 percent 5.75 percent 6.25 percent
4.00 percent 4.25 percent 4.70 percent 5.75 percent 6.25 percent

Explanation / Answer

Hi,

Please find the answer as follows:

Rate = ?

PMT = 1000*.06*1/2 = 30 (indicates interest payment)

PV = 1000*97% = -970 (indicates current price)

FV = 1000

Nper = 22*2 = 44 (indicates total payments, since bonds were issued 8 years ago, so remaining years to maturity are only 22)

Pre Tax Cost of Debt = Rate(nper,pmt,pv,fv) = Rate(44,30,-970,1000)*2 = 6.25%

After Tax Cost of Debt = Pretax Cost of Debt*(1-t) = 6.25%*(1-.32) = 4.25%

Option B (4.25%) is the correct answer.

Thanks.

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