Jiminy's Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 6 percent 5 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 24 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.) b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Pretax cost of debt % b. Aftertax cost of debt %
Jiminy's Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 6 percent 5 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 24 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.) b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Pretax cost of debt % b. Aftertax cost of debt %
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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![**Understanding the Cost of Debt**
Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 6 percent 5 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 24 percent.
**Questions:**
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.)
b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
**Solution Table:**
| | | |
|----------|-------------------------------------------|---------------|
| a. | Pretax cost of debt | \_\_\_\_% |
| b. | Aftertax cost of debt | \_\_\_\_% |
**Explanation:**
In this problem, you are asked to calculate the pretax and aftertax costs of debt for the bond issued by Jiminy’s Cricket Farm. The bond details provided are as follows:
- Original maturity: 25 years
- Remaining maturity: 20 years (since it was issued 5 years ago)
- Semiannual coupon rate: 6%
- Current price: 108% of face value
- Company’s tax rate: 24%
To solve these problems, one would typically use the following formulas:
1. **Pretax Cost of Debt**:
This can be estimated by finding the yield to maturity (YTM) on the bond. Generally, this involves solving for \( r \) in the bond pricing formula:
\[
P = \frac{C}{(1 + r)^1} + \frac{C}{(1 + r)^2} + \cdots + \frac{C+F}{(1+r)^n}
\]
Where:
- \( P \) is the current price of the bond.
- \( C \) is the coupon payment.
- \( F \) is the face value of the bond.
- \( r \) is the yield per period.
- \( n \) is the number of periods remaining.
2. **Aftertax Cost of Debt**:
This can be calculated using the formula:
\[
r_{\text](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4075dd7b-7cf0-4080-a9ab-c20ff4793850%2F59f170ba-f795-4e15-961f-6a8b851e717b%2Fxwnqcsm_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Understanding the Cost of Debt**
Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 6 percent 5 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 24 percent.
**Questions:**
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.)
b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
**Solution Table:**
| | | |
|----------|-------------------------------------------|---------------|
| a. | Pretax cost of debt | \_\_\_\_% |
| b. | Aftertax cost of debt | \_\_\_\_% |
**Explanation:**
In this problem, you are asked to calculate the pretax and aftertax costs of debt for the bond issued by Jiminy’s Cricket Farm. The bond details provided are as follows:
- Original maturity: 25 years
- Remaining maturity: 20 years (since it was issued 5 years ago)
- Semiannual coupon rate: 6%
- Current price: 108% of face value
- Company’s tax rate: 24%
To solve these problems, one would typically use the following formulas:
1. **Pretax Cost of Debt**:
This can be estimated by finding the yield to maturity (YTM) on the bond. Generally, this involves solving for \( r \) in the bond pricing formula:
\[
P = \frac{C}{(1 + r)^1} + \frac{C}{(1 + r)^2} + \cdots + \frac{C+F}{(1+r)^n}
\]
Where:
- \( P \) is the current price of the bond.
- \( C \) is the coupon payment.
- \( F \) is the face value of the bond.
- \( r \) is the yield per period.
- \( n \) is the number of periods remaining.
2. **Aftertax Cost of Debt**:
This can be calculated using the formula:
\[
r_{\text
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