Question

Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon rate of 7 percent 5 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 24 percent. The book value of the debt issue is $55 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 9 years left to maturity; the book value of this issue is $40 million, and the bonds sell for 64 percent of par. |

**just need the "Cost of debt" percentage**

c. |
What is your best estimate of the aftertax cost of debt?
(Do not round intermediate calculations and enter your
answer as a percent rounded to 2 decimal places, e.g.,
32.16.) |

Answer #1

YTM of first bond is calculated as follows

Let's assume par value of single bond = 1000

Coupon= 7%*1000/2 = 35

Price = 95%*1000 = 950

Number of Periods = 25*2 = 50

YTM using excel formula =2*RATE(50,350,-950,1000) = 7.4435%

Price of second bond = 64%*1000 = 640

Number of periods = 14

YTM of second bond = (1000/640)^(1/9)-1 = 5.0837%

Cost of debt = Cost of Debt * Weight of market value of debt + Cost
of zero coupon debt* Weight of market value of zero coupon =
7.4435%*95%*55/77.85+5.0837%*64%*40/77.85= 6.6675%

After tax cost of Debt = 6.6675%*(1-Tax rate) = 6.6675%*(1-24%) =
**5.07%**

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