Jiminy’s Cricket Farm issued a 25-year, 6 percent semiannual bond 2 years ago. T
ID: 2654803 • Letter: J
Question
Jiminy’s Cricket Farm issued a 25-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 percent.
Suppose the book value of the debt issue is $45 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is $45 million, and the bonds sell for 53 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.)
What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
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 %
I am having trouble finding the % cost of debt. Can someone help me, please!
Jiminy’s Cricket Farm issued a 25-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 percent.
Suppose the book value of the debt issue is $45 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is $45 million, and the bonds sell for 53 percent of par.
Explanation / Answer
Jiminy’s Cricket Farm issued a 25-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 percent.Suppose the book value of the debt issue is $45 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is $45 million, and the bonds sell for 53 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 = Book Value of Zero Coupon Bond + Book Value of Coupon Bond
Total book value = 45000000 + 45000000
Total book value = 90,000,000
What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Market Value of Zero Coupon Bond = 53%*45000000
Market Value of Zero Coupon Bond = 23,850,000
Market Value of Coupon Bond = 92%*45000000
Market Value of Coupon Bond = 41,400,000
Total Market value = Market Value of Zero Coupon Bond + Market Value of Coupon Bond
Total Market value = 23850000 + 41400000
Total Market value = 65,250,000
What is your best estimate of the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16))
Before tax Cost of Zero Coupon Bond = rate(nper,pmt,pv,fv)
Before tax Cost of Zero Coupon Bond = rate(12,0,-23.85,45)
Before tax Cost of Zero Coupon Bond = 5.43%
Before tax Cost of Coupon Bond = rate(nper,pmt,pv,fv)*2
nper = (25-2)*2 = 46
pmt = 6%*45*1/2 = 1.35 Million
pv = 41.40 Million
fv = 45 million
Before tax Cost of Coupon Bond = rate(46,1.35,-41.40,45)*2
Before tax Cost of Coupon Bond = 6.69%
Aftertax cost of debt = Weight of Coupon Bond * After tax cost of Coupon Bond + Weight of Zero Coupon Bond * After tax cost of Zero Coupon Bond
Aftertax cost of debt = 41.40/65.25*6.69*(1-40%) + 23.85/65.25*5.43*(1-40%)
Aftertax cost of debt = 3.74%
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