Jiminy\'s Cricket Farm issued a 15-year, 6 percent semiannual bond 2 years ago.
ID: 2723764 • Letter: J
Question
Jiminy's Cricket Farm issued a 15-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 95 percent of its face value. The company's tax rate is 40 percent. Suppose the book value of the debt issue is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 15 years left to maturity; the book value of this issue is $35 million, and the bonds sell for 51 percent of par. What is the company's total book value of debt? What is the company's total market value of debt? What is your best estimate of the after tax cost of debt?Explanation / Answer
1
Calculation of Company's Book Value of Debt:
Book Value of 6% Bond
$ 60,000,000
Book Value of Zero Coupon Bond
$ 35,000,000
Company's Book Value of Debt =
$ 95,000,000
2
Calculation of Company's total Market value of Bonds:
Market Value of 6% Bond (6000000*95%) =
$ 57,000,000
Book Value of Zero Coupon Bond = (35000000*51%)
$ 17,850,000
Company's Book Value of Debt =
$ 74,850,000
3
Calculation of After tax Cost of Debt:
Debt
Interest Rate
Tax Rate
Cost net of tax
Weight
A
B
C = A*(1-B)
D
C*D
6% Bond
6%
40%
3.60%
0.76152305
2.74%
(57000000/74850000)
Zero coupon bond
10.29%
40%
6.17%
0.23847695
1.47%
=RATE(15,0,-17850000,3500000,0,5%)
(17850000/74850000)
Cost of Debt (After Tax) =
4.21%
1
Calculation of Company's Book Value of Debt:
Book Value of 6% Bond
$ 60,000,000
Book Value of Zero Coupon Bond
$ 35,000,000
Company's Book Value of Debt =
$ 95,000,000
2
Calculation of Company's total Market value of Bonds:
Market Value of 6% Bond (6000000*95%) =
$ 57,000,000
Book Value of Zero Coupon Bond = (35000000*51%)
$ 17,850,000
Company's Book Value of Debt =
$ 74,850,000
3
Calculation of After tax Cost of Debt:
Debt
Interest Rate
Tax Rate
Cost net of tax
Weight
A
B
C = A*(1-B)
D
C*D
6% Bond
6%
40%
3.60%
0.76152305
2.74%
(57000000/74850000)
Zero coupon bond
10.29%
40%
6.17%
0.23847695
1.47%
=RATE(15,0,-17850000,3500000,0,5%)
(17850000/74850000)
Cost of Debt (After Tax) =
4.21%
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