Question

Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon rate of 5 percent 3 years ago. The bond currently sells for 94 percent of its face value. The company’s tax rate is 22 percent. 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 7 years left to maturity; the book value of this issue is $45 million, and the bonds sell for 74 percent of par.

What is company's total book value of debt?

what is the company's total market value of debt?

What is your best estimate of the aftertax cost of debt?

Answer #1

Book value of debt = Book value of bond + book value of Zero coupon bond

= 50 + 45 = $95 million

Market Value of debt = (50*94%) + (45*74%) = $80.3 Million

Cost of debt :

Yeild of bond (Financial calculator )

PV : 47

Coupon semiannual : (50*5%*6/12) = $1.25 Million

Period remaining : 27years*2 = 54

Interest rate = 1.41% semiannual, Annual = 2.82%

Yeild on Zero coupon

= (100/74)^(1/7)-1 = 4.49%

Therefor, after tax cost of debt = (2.82%+4.49%)*(1-tax(22%) = 5.63%

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