Jiminy\'s Cricket Farm issued a 30-year, 7.4 percent semiannual bond 5 years ago
ID: 2640441 • Letter: J
Question
Jiminy's Cricket Farm issued a 30-year, 7.4 percent semiannual bond 5 years ago. The bond currently sells for 87 percent of its face value. The book value of this debt issue is $104 million. In addition, the company has a second debt issue, a zero coupon bond with 8 years left to maturity; the book value of this issue is $63 million, and it sells for 59.5 percent of par. The company
Jiminy's Cricket Farm issued a 30-year, 7.4 percent semiannual bond 5 years ago. The bond currently sells for 87 percent of its face value. The book value of this debt issue is $104 million. In addition, the company has a second debt issue, a zero coupon bond with 8 years left to maturity; the book value of this issue is $63 million, and it sells for 59.5 percent of par. The company
Explanation / Answer
Total book value of the debt=104 +63= $167,000,000
Total market value of debt=87% of 104000000+59.5% of 63000000
=90480000+37485000
=$ 127965000
After tax cost of 7.4% bond
If we take effective interest rate ,it is r=(1+(.074/2) ) -1=7.53 % becomes the effective int.rate
Then after tax cost is Int. rate(1-tax rate)
7.53 (1-0.40)
7.53 *0.60 =4.518 4.52%
Zero coupon bonds are zero interst and hence ,tax-free bonds.Since no interest is paid, no tax saving is involved.
After tax cost of Jimini's debt
If 7.4% int is considered then After-tax cost is 4.44% and after-tax cost of debt is0.6228*4.44=
2.765%
Debt Proportion After-tax cost Col.2*Col3 104M 0.6228 4.518 2.814 63 M 0.3772 0 0 1.0000 2.814 Total 2.814Related Questions
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