Question
NEED HELP WITH PART D PLS! LO2 6. Calculating Cost of Debt Jiminy's Cricket Farm issued a 30-year, 4.5 percent semiannual bond three years ago.
NEED HELP WITH PART D PLS!
LO2 6. Calculating Cost of Debt Jiminy's Cricket Farm issued a 30-year, 4.5 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.
a. What is the pretax cost of debt? ANSWER:4.25%
b. What is aftertax cost of debt? ANSWER: 3.31%
c. Which is more relevant, the pretax or the aftertax cost of debt? Why? ANSWER: Aftertax cost of debt is more relevant because it is the true cost of debt to the company.
d. Suppose the book value of the debt issue is $75 million. In addition, the company has a second debt issue, a zero coupon bond with eight years left to maturity; the book value of this issue is $30 million, and it sells for 81 percent of par. What is the total book value of debt? The total market value? What is the aftertax cost of debt now?
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