Frost Inc. issued a 20-year, 8% semi-annual bond 5 years ago. The bond currently sells for 105% of its face value. The company’s tax rate is 40%.
a) What is the pre tax cost of debt?
b) What is the after-tax cost of debt?
For the firm in the previous problem, suppose the book value of the debt issue is $50 million. In addition, the company has a second debt issue on the market, a zero coupon bond with eight years left to maturity; the book value of this issue is $70 million and the bonds sell for 72% of par. What is the company’s total book value of debt? The total market value? What is your best estimate of the after-tax cost of debt now?