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11 August, 22:42

Jiminy's Cricket Farm issued a 20-year, 7 percent semiannual coupon bond 4 years ago. The bond currently sells for 104 percent of its face value. The company's tax rate is 23 percent. a. What is the company's pretax cost of debt?

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  1. 11 August, 22:46
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    6.64%

    Explanation:

    The pretax cost of debt is the Yield to Maturity (YTM). Since the coupons are paid semiannually, adjust the duration and the coupon payment amount to semi-annual terms.

    You can solve for the YTM using a financial calculator with the following inputs;

    Maturity of the bond; N = 20*2 = 40

    Face value; FV = 1000

    Semi-annual coupon payment; PMT = (7%/2) * 1000 = 35

    Current price of the bond; PV = - 1.04*1000 = - 1040

    Then compute the semiannual interest rate; CPT I/Y = 3.318%

    Therefore, pretax cost of debt; YTM = 3.318 * 2 = 6.64%
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Home » Business » Jiminy's Cricket Farm issued a 20-year, 7 percent semiannual coupon bond 4 years ago. The bond currently sells for 104 percent of its face value. The company's tax rate is 23 percent. a. What is the company's pretax cost of debt?
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