Question

Himiny's Cricket Farm Issued a 25-year, 16 percent semiannual bond 3 years ago. The bond currently sells for 89 percent of its face value. The company's tax rate is 33 percent. What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 2 decimal places. For example, 0.12345 or 12.345% should be entered as 12.35.)

Answer 1

Pre-tax Cost of Debt for Himiny's Cricket Farm

The Pre-tax Cost of Debt for Himiny's Cricket Farm is the Yield to maturity of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount [$1,000 x 16% x ½]	PMT	80
Yield to Maturity [YTM]	1/Y	?
Time to Maturity [(25 Years – 3 Years) x 2]	N	44
Bond Price [-1,000 x 89%]	PV	-890

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 18.03%

“Hence, the Pre-tax Cost of Debt for Himiny's Cricket Farm would be 18.03%”