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jiminy's Cricket farm issued a 20-year, 7 percent, semi annual bond four years ago. the bond...

jiminy's Cricket farm issued a 20-year, 7 percent, semi annual bond four years ago. the bond currently sells for 108% of its face value. what is the aftertax cost of debt if the companys combined tax rate is 23%?

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Expert Solution

We can calculate the after tax cost of debt as follows:

Let the Par Value of Bond = $ 1000

Current Value = Par Value * 108%

= 1000 * 1.08

= $ 1,080

Coupon Rate = 7%

Payment = Semiannually

Total period = 20 years

Bond was issued 4 years ago, So period left is

= 20 - 4

= 16 years

Further we can use this information to calculate the yield to maturity of the bond as follows:

Formulas used in the excel sheet are:

So, the after tax cost of debt comes out to be 4.78%.

Hope I am able to solve your concern. If you are satisfied hit a thumbs up !!

jeff jeffy answered 2 years ago
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