Jiminy\'s Cricket Farm issued a 30-year, 7 percent semi-annual bond 6 years ago.
ID: 2628632 • Letter: J
Question
Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 6 years ago. The bond currently sells for 90 percent of its face value. The book value of the debt issue is $20 million. The company's tax rate is 34 percent, and the bond has a YTM of 7.94%.
In addition, the company has a second debt issue on the market, a zero coupon bond with 6 years left to maturity; the book value of this issue is $67 million, the face value (also called par value) is $82 million, and the bonds sell for 78 percent of par.
(a) What is the company's total book value of debt?
188,250,000; 14,250,000; 87,000,000; 188,400,000; 81,960,000
(b) What is the company's total market value of debt?
85,238,400; 77,862,000; 81,960,000; 86,058,000; 87,000,000
(c) What is your best estimate of the aftertax cost of debt (leave as an APR)?
3.14; 2.5; 3.31; 4.21; 4.42
Explanation / Answer
a)
book value of debt = 20milion + 67 = 87,000,000
b) market value of debt = 0.9 * 20,000,000 + 0.78 * 82000000 = 81,960,000
c)
yield of zero bond = (82000000/0.78 *82000000)^(1/6) -1 = 4.23%
after tax cost of debt = ( 7.94% * (1-0.34) + 4.23 * (1-0.34))/2 = 4.21%
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