Jiminy\'s Cricket Farm issued a 30-year, 7.4 percent semiannual bond 5 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 7.4 percent semiannual bond 5 years ago. The bond currently sells for 87 percent of its face value. The book value of this debt issue is $104 million. In addition, the company has a second debt issue, a zero coupon bond with 8 years left to maturity; the book value of this issue is $63 million, and it sells for 59.5 percent of par. The company’s tax rate is 40 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 $ 167,000,000 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 $ 127,965,000 What is the aftertax cost of the 7.4 percent coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Aftertax 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).) Aftertax 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).) Aftertax cost of debt 4.84 %

Explanation / Answer

Total book value of debt= 104mn+63mn= $167,000,000

total market vlaue of debt= (87%*104mn)+(59.5%*63mn)=$127,965,000

Afetr tax cost of debt of 7.4% coupon bond is:

cost of debt= interest paid/market value of debt

=(104*10^6*7.4%)/(87%*104*10^6)

=8.51%

After tax =(1-tax rate)*8.51%. Assuming 40% tax rate

=8.51%*0.6=5.1%

After tax cost of debt for coupon bond

=[(63/59.5)^(1/5)]-1

=1.15%

after tax=0.4*1.15%=.46%

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.