7. Calculating Cost of Debt [LO2] Jiminy's Cricket Farm issued a 30-year, 6 percent semiannual bond three years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 22 percent. a. What is the pretax cost of debt? b. What is the aftertax cost of debt? c. Which is more relevant, the pretax or the aftertax cost of debt? Why?

7. Calculating Cost of Debt [LO2] Jiminy's Cricket Farm issued a 30-year, 6 percent semiannual bond three years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 22 percent. a. What is the pretax cost of debt? b. What is the aftertax cost of debt? c. Which is more relevant, the pretax or the aftertax cost of debt? Why?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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PA2. LO 13.1 On July 1, Somerset Inc. issued $200,000 of 10%, 10-year bonds when the market rate was 12%. The bonds paid interest semi-annually. Assuming the bonds sold at 58.55, what was the selling price of the bonds? Explain why the cash received from selling this bond is different from the $200,000 face value of the bond. For your extra credit please address the following items: 1.) Prepare the journal entry for issuance on July 1. 2.) Prepare the journal entry to record the first interest payment and amortization. Use December 31 as your date for this entry. Show your work. 3.) What is the bond's carrying value at December 31. Show your work.
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7A-12 For a face value of $1,000, a zero-coupon bond maturates in 15 years. It has a 7% coupon, so I should be able to cash it in by the time I'm 70. pay in the first year For argument's sake, assume the taxpayer has a 25% effective tax rate a. $5.25b. $5.44c. $5.99d. $6.25e. $6.34
9.27 Debt Valuation: Zero-Coupon Debentures. At the beginning of the year, Park Inc. issued $150 million (maturity value) of 10-year, zero-coupon debentures, at a time when the yield rate was four percent annually. The Park, Inc. bonds would be subject to semiannual compounding. Required1. Calculate the proceeds to be received by Park Inc. when the bonds are sold. 2. Calculate the cost to repurchase and retire the bonds after five years assuming that the market yield rate at that time is five percent annually. Is the early retirement of debt a good decision in this set of circumstances? What factors did you consider in reaching your decision? 3. Under what circumstances would a company consider issuing zero-coupon debentures instead of regular interest-bearing debentures?
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QUESTION TWO A large Bahraini company issued BD10,000, 10%, 10-year bonds that paid interest semi- annually. You bought the bonds for BD9,000 per bond. What was your yield to maturity? (Be careful.) What is the company's after tax cost of debt if the corporate tax rate is 30%?
Ins 8. Suppose that today's interest rate on 1-year bonds is 4% (i10 year bonds next year, in two years, and in three years are expected to be 5%, 6%, and 7%, respectively. 0.04). Interest rates on 1- ha a. According to the Expectations Theory of Term Structure, what are the equilibrium interest rates today for otherwise comparable 2-year, 3-year, and 4-year bonds? b. Draw the yield curve for that case. or
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5 2 Chamberlain Company wants to issue new 18-year bonds for some much-needed expansion projects. The company currently has 9.8 percent coupon bonds on the market that sell for $865.21, make semiannual payments, and mature in 18 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? Assume a par value of $1,000.
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4. Problem 10.01 (After-Tax Cost of Debt) eBook The Holmes Company's currently outstanding bonds have an 8% coupon and a 10% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places. %

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