Jimmy\'s Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. T

Question

Jimmy's Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company?s tax rate is 35 percent. Suppose 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 13 years left to maturity; the book value of this issue is $50 million, and the bonds sell for 54 percent of par. What is the company?s total book value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Total book value $ ___________ What is the company?s total market value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Total market value $ _______________ What is your best estimate of the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of debt ___________ %

Explanation / Answer

1) What is the Company's total book value of debt

Total Book Value of Debt = 50 Million + 50 Million

Total Book Value of Debt = $ 100,000,000

2) what is the company's total market value of debt

Total Market Value of Debt = 50 Million*93% + 50 Million*54%

Total Market Value of Debt = $ 73,500,000

3) what is your best estimate of the after tax cost of debt

Step1

Cost of debt for coupon Bond = rate(nper,pmt,pv,fv)*2

nper = 27*2 = 54

pmt = 8%*1/2*1000 = 40

pv = 1000*93% = 930

fv = 1000

Cost of debt for coupon Bond = rate(54,40,-930,1000)*2

Cost of debt for coupon Bond = 8.6755%

After tax cost of debt for coupon Bond = 8.6755% * (1-35%)

After tax cost of debt for coupon Bond = 5.64%

Step2

Cost of debt for Zero coupon Bond = rate(nper,pmt,pv,fv)

nper = 13

pmt = 0

pv = 1000*54% = 540

fv = 1000

Cost of debt for Zero coupon Bond = rate(13,0,-540,1000)

Cost of debt for Zero coupon Bond = 4.85%

After tax cost of debt for Zero coupon Bond = 4.85% * (1-35%)

After tax cost of debt for Zero coupon Bond = 3.1525%

Step3

Best estimate of the after tax cost of debt = 5.64%*46.50/73.5 + 3.1525%*27/73.50

Best estimate of the after tax cost of debt = 4.73%

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