Dan's Bakery issued a $30-$year, $4\mathrm{.}5$ percent semiannual bond three years ago. The bond currently sells for $104$ percent of its face value. The company$$s tax rate is $22$ percent.

What is the pretax cost of debt?

What is the aftertax cost of debt?

Which is more relevant, the pretax or the aftertax cost of debt? Why?

Suppose the book value of the debt issue is $$75$ million. In addition, the company has a second debt issue on the market, a zero coupon bond with eight years left to maturity; the book value of this issue is $$30$ million, and the bonds sell for $81$ percent of par. What is the company$$s total book value of debt? The total market value? What is your best estimate of the aftertax cost of debt now?

Existing debt:

YTM $=4\mathrm{.}25\%$

after tax $=3\mathrm{.}31\%$

book value of debt:

first issue $=75,000,000$

second issue $=30,000,000$

market value of debt:

first issue $=78,000,000$

second issue $=24,300,000$

find:

$-$ weight

$-$ new zero coupond bond YTM and after tax

$-$ Weighted average cost of debt