The pretax cost of debt, given the selling price of the bond and the interest rate, is 4. 25 %.
The aftertax cost of debt, given the company tax rate, is 3. 31%.
The cost of debt to Jiminy's cricket farm, will be the yield to maturity on the bond. This yield to maturity can be found by the formula :
= ( Periodic coupon payment + ( face value - market value ) / years to maturity ) / ( face value + market value ) / 2 )
Periodic coupon payment :
= 4.5 % / 2 x 100
= $ 2.25
Number of years :
= 30 x 2
= 60 semi annual periods
Yield to maturity and pretax cost of debt :
= (( 2.25 + ( 100 - 104 ) / 60 ) / ( 100 + 104 ) / 2)
= 4. 25 %
The after-tax cost of debt is :
= Pretax cost of debt x ( 1 - tax rate )
= 4. 25 % x ( 1 - 22 %)
= 3. 31%
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