Question

Please show all work and double check. I will deff give a thumbs up. Thank you!

Problem 12-2 Calculating Cost of Debt J&R Renovation, Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has a coupon rate of 4 percent annually. What is the company's 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 If the tax rate is 35 percent, 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

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =18x2

1080 =∑ [(4*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^18x2

k=1

YTM% = 3.4 = pretax cost of debt

After tax rate = YTM * (1-Tax rate)

After tax rate = 3.4 * (1-0.35)

After tax rate = 2.21