Jiminy\'s Cricket Farm issued a 30-year, 7.6 percent semiannual bond 8 years ago
ID: 2645926 • Letter: J
Question
Jiminy's Cricket Farm issued a 30-year, 7.6 percent semiannual bond 8 years ago. The bond currently sells for 88.5 percent of its face value. The book value of this debt issue is $101 million. In addition, the company has a second debt issue, a zero coupon bond with 11 years left to maturity; the book value of this issue is $60 million, and it sells for 58 percent of par. The company
Jiminy's Cricket Farm issued a 30-year, 7.6 percent semiannual bond 8 years ago. The bond currently sells for 88.5 percent of its face value. The book value of this debt issue is $101 million. In addition, the company has a second debt issue, a zero coupon bond with 11 years left to maturity; the book value of this issue is $60 million, and it sells for 58 percent of par. The company
Explanation / Answer
Requirement 1:
What is the total book value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Total book value of debt = Book Value of Coupon Bond + Book Value of Zero Coupon Bond
Book Value of Coupon Bond = $ 101,000,000
Book Value of Zero Coupon Bond = $ 60,000,000
Total book value of debt = 101,000,000 + 60,000,000
Total book value of debt = 161,000,000
Answer
Total book value of debt $ 161,000,000
Requirement 2:
What is the total market value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Total Market value of debt = Market Value of Coupon Bond + Market Value of Zero Coupon Bond
Market Value of Coupon Bond = $ 101,000,000*88.5% = $ 89,385,000
Market Value of Zero Coupon Bond = $ 60,000,000*58% = $ 34,800,000
Total Market value of debt = 89,385,000 + 34,800,000
Total Market value of debt = 124,185,000
Answer
Total market value $ 124,185,000
Requirement 3:
What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Coupon Bond
Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Before Tax Cost of Debt = rate(44,38,-885,1000) * 2
Before Tax Cost of Debt = 8.79 %
After Tax Cost of Debt = 8.79*(1-34%)
After Tax Cost of Debt = 5.80%
Zero Coupon Bond
Before Tax Cost of Debt = rate(nper,pmt,pv,fv)
Before Tax Cost of Debt = rate(11,0,-580,1000)
Before Tax Cost of Debt = 5.08%
After Tax Cost of Debt = 5.08*(1-34%)
After Tax Cost of Debt = 3.35%
After Tax Cost of Debt of Jiminy's Cricket Farm = Weight of Coupon Bond * After Tax Cost of Debt of Coupon Bond + Weight of Zero Coupon Bond * After Tax Cost of Debt of Zero Coupon Bond
After Tax Cost of Debt of Jiminy's Cricket Farm = 89385/124185 * 5.80 + 34800/124185*3.35
After Tax Cost of Debt of Jiminy's Cricket Farm = 5.11%
Answer
Aftertax cost of debt 5.11 %
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.