Question

Jiminy's Cricket Farm issued a 30-year, 8 percent, semiannual bond 6 years ago. The bond currently sells for 104 percent of its face value. What is the before tax cost of debt if the company's tax rate is 31%?

Answer 1

Answer:

Face Value = $1,000
Current Price = 104%*$1,000 = $1,040

Annual Coupon Rate = 8%
Semiannual Coupon Rate = 4%
Semiannual Coupon = 4%*$1,000 = $40

Time to Maturity = 24 years
Semiannual Period to Maturity = 48

Let semiannual YTM be i%

$1,040 = $40 * PVIFA(i%, 48) + $1,000 * PVIF(i%, 48)

Using financial calculator:
N = 48
PV = -1040
PMT = 40
FV = 1000

I = 3.82%

Semiannual YTM = 3.82%
Annual YTM = 2 * 3.82%
Annual YTM = 7.64%

Before-tax Cost of Debt = 7.64%