Jones Cricket Institute issued a 30 year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. a. What is the pre-taxed cost of debt? b. What is the after-tax cost of debt? c. Which is more relevant, the pre-tax or the after-tax cost of debt? Why?
Jones Cricket Institute issued a 30 year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.
a. What is the pre-taxed cost of debt?
b. What is the after-tax cost of debt?
c. Which is more relevant, the pre-tax or the after-tax cost of debt? Why?
In the question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero-coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sells for 57 percent of par.
a. What is the company’s total book value of debt?
b. The total market value?
c. What is your best estimate of the after-tax cost of debt now?
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