Problem 12-7 Calculating Cost of Debt [LO 2] iminy\'s Cricket Farm issued a 30-y
ID: 2804531 • Letter: P
Question
Problem 12-7 Calculating Cost of Debt [LO 2] iminy's Cricket Farm issued a 30-year, 7.4 percent semiannual bond 9 years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 30 percent a. What is the pretax cost of debt? (Do not round intermediate calculations and 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 debl? (Do not round intermodiate calculations and 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? 3 8Explanation / Answer
Time to maturity 30 Coupon rate 7.40% Face value 100 Price 93.00 Tax rate 30% Yeild to maturity after 9 years 8.10% So the pre tax cost of debt is nothing but then yield to maturity Pretax cost of debt 8.10% After tax cost of debt` 5.67% It is pretax cost of debt*(1-tax rate) The after tax cost of debt is more relevant as it is used in WACC calculations and debt holders will get anything after tax being paid