Jiminys Cricket Farm issued a 20-year, 7 percent semiannual
bond four years ago. The bond currently sells for 98 percent of its
face value. The companys tax rate is 25 percent.
For the same firm, suppose the book value of the debt issue is
$75 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 $30 million, and the bonds sell for
80 percent of par. What is your best estimate of the aftertax cost
of debt now?
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