Jiminy\'s Cricket Farm issued a 30-year, 7 percent semiannual bond 9 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 7 percent semiannual bond 9 years ago. The bond currently sells for 88 percent of its face value. The book value of this debt issue is $102 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $61 million, and it sells for 58.5 percent of par. The company

Jiminy's Cricket Farm issued a 30-year, 7 percent semiannual bond 9 years ago. The bond currently sells for 88 percent of its face value. The book value of this debt issue is $102 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $61 million, and it sells for 58.5 percent of par. The company

Explanation / Answer

(1)

Total book value of debt = 102,000,000 + 61,000,000 = $163,000,000

(2)

Total market value = 102,000,000*.88 + 61,000,000*.588 = $125,628,000

(3)

calculate the cost of first bond

102,000,000*.88 = 102,000,000*.07/2*PVIFA(i/2,42) + 102,000,000*PVIF(i/2,42)

i = 8.2080%

calculate the second of first bond

61,000,000*.588 = 61,000,000/(1+i)^12

i = 4.5246%

aftertax cost of debt = (8.2080%*102,000,000*.88/125,628,000 + 4.5246%*61,000,000*.588/125,628,000)*(1-.3) = 5.01%

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