J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 9 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             %

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Asked Nov 24, 2019
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J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 9 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             %

 
 
 
 
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Expert Answer

Step 1

Calculation of Pre-tax Cost of Debt and After-tax Cost of Debt:

The pre-tax cost of debt is 8.28% and after-tax cost of debt is 5.38%.

Excel Spreadsheet:

...
В
1 Face Value
$1,000
$1,070
2 Bond Price
3 Coupon Payment
4 Number of Periods
$45
40
5 Tax Rate
35%
6
Pretax Cost of Debt
8.28%
Aftertax Cost of Debt
7
5.38%
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В 1 Face Value $1,000 $1,070 2 Bond Price 3 Coupon Payment 4 Number of Periods $45 40 5 Tax Rate 35% 6 Pretax Cost of Debt 8.28% Aftertax Cost of Debt 7 5.38%

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