Jiminy\'s Cricket Farm issued a 30-year, 8 percent semi-annual bond 7 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 8 percent semi-annual bond 7 years ago. The bond currently sells for 88 percent of its face value. The book value of the debt issue is $16 million. The company's tax rate is 34 percent. In addition, the company has a second debt issue on the market, a zero coupon bond with 7 years left to maturity; the book value of this issue is $82 million and the bonds sell for 77 percent of par.

Required:

(a) What is the company's total book value of debt? (Do not round your intermediate calculations.)

(b) What is the company's total market value of debt? (Do not round your intermediate calculations.)

(c) What is your best estimate of the aftertax cost of debt? (Do not round your intermediate calculations.)

Explanation / Answer

old issue 2nd issue total book value of bond 16 82 98 market value of debt 14.08 63.14 77.22 cost of debt Interest+ (Face value - market price)/ years to maturity /( face value+market value) / 2 interest 1.28 1.3511111 15.04 0.1749409 17.49409 after tax cost 11.5461 percent cost of zero coupon bond Yield to Maturity = (Face Value / Current Price of Bond) ^ (1 / Years to Maturity) - 1 (82/63.14)^1/7 -1 3.79% after tax cost 2.5014 book value of debt weight rate weight*rate overall cost of debt 16 0.1481481 11.5460993 1.71053323 92 0.8518519 2.5014 2.13082222 total debt 108 total debt cost 3.84135545 percent

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