Moldova Beef Farm issued a 25-year, 9 percent semi-annual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 35 percent. What is the pretax and after-tax cost of debt? Which is more relevant, the pretax or the after-tax cost of debt? Why?
Suppose now 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 seven years left to maturity; the book value of this issue is 170 million and the bonds sell for 58 percent 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?