Question

Suspect Corp. issued a bond with a maturity of 18 years and a semiannual coupon rate of 8 percent 3 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

a. What is the pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Pretax cost of debt             %

b. What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Aftertax cost of debt             %

c. Which is more relevant, the pretax or the aftertax cost of debt?

Answer 1

Par value			1000
Issue price			920
Semi annual Interestt			40
Annuity PVF for 30 periods at 4.49%			16.30807
PV F for 30 periods at 4.49%			0.26777
Present value of interest			652.3228
Present value of Maturity value			267.77
Price			920.0928
Before tax cost of debt = 4.49*2 = 8.98%
After tx Cost f debt = 8.98% (1-0.35) = 5.84%
After tax cost of debt is more relevant