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    Cost of Debt-Pretax and After tax

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    Jiminy's Cricket Farm issued a 30-year, 9 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 35 percent.

    a. What is the pretax cost of debt?
    b. What is the aftertax cost of debt?
    c. Which is more relevant, the pretax or the aftertax? Why?

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    Solution Preview

    Jiminy's Cricket Farm issued a 30-year, 9 percent semiannual bond 7 years ago.  The bond currently sells for 108 percent of its face value.  The company's tax rate is 35 percent.

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

    Solution Summary

    Cost of Debt (Pretax and After tax) are calculated

    $2.19

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