Jimin Cricket Farm issued a 30-year, 7.6 percent semiannual bond 7 years ago. Th
ID: 2650915 • Letter: J
Question
Jimin Cricket Farm issued a 30-year, 7.6 percent semiannual bond 7 years ago. The bond currently sells for 86.5 percent of its face value. The book value of this debt issue is $105 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value of this issue is $64 million, and it sells for 60 percent of par. The company's tax rate is 35 percent. Required 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 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 What is the aftertax cost of the 7.6 percent coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) After tax cost of debt What is the aftertax cost of the zero coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) After tax cost of debt 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).) After tax cost of debtExplanation / Answer
a) Book Value of Coupon Bond = $ 105,000,000
Book Value of Zero Coupon Bond = $ 64,000,000
Total Book Value of Debt = Book Value of Coupon Bond + Book Value of Zero Coupon Bond
Total Book Value of Debt = 105,000,000 + 64,000,000
Total Book Value of Debt = $ 169,000,000
b)
Market Value of Coupon Bond = $ 105,000,000*86.5%
Market Value of Coupon Bond = $ 90,825,000
Market Value of Zero Coupon Bond = $ 64,000,000*60%
Market Value of Zero Coupon Bond = $ 38,400,000
Total Market Value of Debt = Market Value of Coupon Bond + Market Value of Zero Coupon Bond
Total Market Value of Debt = 90,825,000 + 38,400,000
Total Market Value of Debt = $ 129,225,000
c)
Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Nper (indicates the semi annual period) = (30-7)*2 = 46
PV (indicates the price) = 1000*86.5% = 865
PMT (indicate the semi annual payment) = 1000*7.6%*1/2 = 38
FV (indicates the face value) = 1000
Rate (indicates YTM) = ?
Before Tax Cost of Debt = rate(46,38,-865,1000) * 2
Before Tax Cost of Debt = 9.00 %
After Tax Cost of Debt = 9*(1-35%)
After Tax Cost of Debt =5.85%
d)
Before Tax Cost of Debt = rate(nper,pmt,pv,fv)
Nper (indicates the annual period) = 10
PV (indicates the price) = 1000*60% = 600
PMT (indicate the annual payment) = 0
FV (indicates the face value) = 1000
Rate (indicates YTM) = ?
Before Tax Cost of Debt = rate(10,0,-600,1000)
Before Tax Cost of Debt = 5.24 %
After Tax Cost of Debt = 5.24*(1-35%)
After Tax Cost of Debt =3.41%
e)
After Tax Cost of Debt = 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 = 90825/129225*5.85 + 38400/129225*3.41
After Tax Cost of Debt = 5.12%
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