Jiminy\'s Cricket Farm issued a 30-year, 7 percent semi-annual bond 7 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 7 years ago. The bond currently sells for 93 percent of its face value. The book value of the debt issue is $17 million. The company's tax rate is 32 percent.

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 $81 million and the bonds sell for 75 percent of par.

What is the company's total market value of debt? (Do not round your intermediate calculations.)

What is your best estimate of the aftertax cost of debt? (Do not round your intermediate calculations.)

Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 7 years ago. The bond currently sells for 93 percent of its face value. The book value of the debt issue is $17 million. The company's tax rate is 32 percent.

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 $81 million and the bonds sell for 75 percent of par.

Explanation / Answer

(a) Total Book Value of Debt Total BVD = BVD1 + BVD2 = $17 million + $81million = $98,000,000 (looks b in your options)

(b) Total MVD = .93*17,000,000 + .75*81,000,000 = 15810000+ 60750000 = 76,560,000 (looks d in your options)

(c) P0 = 930

Coupon = 1000 * 7% * .5 = 35

T = 30-7 * 2 = 46

Since interest expense is tax deductible, the 70 reduces tax by 32%, or 22.40, for a net after tax cost of 47.6

Cost of debt after tax then is 47.60 / 930, or 5.18%

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