Jiminy\'s Cricket Farm issued a 30-year, 7.2 percent semiannual bond 6 years ago
ID: 2719795 • Letter: J
Question
Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 6 years ago. The bond currently sells for 87.5 percent of its face value. The book value of this debt issue is $103 million. In addition, the company has a second debt issue, a zero coupon bond with 9 years left to maturity; the book value of this issue is $62 million, and it sells for 59 percent of par. The company’s tax rate is 38 percent.
What is the total book value of debt?
What is the total market value of debt?
What is the aftertax cost of the 7.2 percent coupon bond?
What is the aftertax cost of the zero coupon bond?
What is the aftertax cost of debt?
What is the total book value of debt?
What is the total market value of debt?
What is the aftertax cost of the 7.2 percent coupon bond?
What is the aftertax cost of the zero coupon bond?
What is the aftertax cost of debt?
Explanation / Answer
What is the total book value of debt?
Total book value of debt = Book Value of Coupon Bond + Book Value of Zero Coupon Bond
Total book value of debt = 103 + 62
Total book value of debt = $ 165 Million
What is the total market value of debt?
Total market value of debt = Market Value of Coupon Bond + Market Value of Zero Coupon Bond
Total market value of debt = 103*87.5% + 62*59%
Total market value of debt = $ 126.705
What is the aftertax cost of the 7.2 percent coupon bond?
Before tax cost of debt = rate(nper,pmt,pv,fv)*2
nper = (30-6)*2 = 48
pmt = 1000*7.2%*1/2 = 36
pv = -875
fv = 1000
Before tax cost of debt = rate(48,36,-875,1000)*2
Before tax cost of debt = 8.42%
After tax cost of Debt = Before tax cost of debt *(1-tax rate)
After tax cost of Debt = 8.42*(1-38%)
After tax cost of Debt = 5.22%
What is the aftertax cost of the zero coupon bond?
Aftertax cost of the zero coupon bond =( (1000/590)^(1/9) -1 ) *(1-38%)
Aftertax cost of the zero coupon bond = 3.74%
What is the aftertax cost of debt?
Aftertax cost of debt = Aftertax cost of the zero coupon bond*weight of zero coupon bond + Aftertax cost of the coupon bond*weight of coupon bond
Aftertax cost of debt = 3.74%*(62*59%)/126.705 + 5.22%* (103*87.5%)/126.705
Aftertax cost of debt = 4.79%
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