Calculating Cost of Debt. Peyton's Colt Farm issued a 30-year, 7% semiannual bond 7 years ago. The bond currently sells for 94% of its face value. The company's tax rate is 35%. What is the pretax cost of debt? What is the aftertax cost of debt?

Answer 1

The pretax answer is:
1000 X 70/100 = 70
1000 X 94/100 = 940
then the pretax is 70/940 which 7.44%

the after tax is
Pretax X (1 - 35/100) = 7.44/100 ( 1-35/100) which = .0744 X (1- .35)
so .0744 X .65
answer of after cost of debt is 4.84%

Answer 2

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