Question

Problem 14-8 Calculating Cost of Debt [LO2]

Jiminy’s Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 4 percent 5 years ago. The bond currently sells for 104 percent of its face value. The company’s tax rate is 24 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 $35 million, and the bonds sell for 79 percent of par.

b.	What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)
c.	What is your best estimate of the aftertax cost of debt?

Answer 1