Jiminy\'s Cricket Farm issued a 30-year, 7.6 percent semiannual bond 5 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 7.6 percent semiannual bond 5 years ago. The bond currently sells for 84.5 percent of its face value. The book value of this debt issue is $109 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 $68 million, and it sells for 62 percent of par. The company’s tax rate is 40 percent.

What is the aftertax cost of the 7.6 percent coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

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).)

Explanation / Answer

Calculate after tax cost of 7.6percent coupon bond:

Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2

Nper (indicates the period) = 25*2 = 50

PV (indicates the price) = 109*84.5% = 92.105 Million

PMT (indicate the semi annual payment) = 109*7.6%*1/2 = 4.142 million

FV (indicates the face value) = 109 million

Rate (indicates YTM) = ?

Before Tax Cost of Debt = rate(50,4.142,-92.105,109) * 2

Before Tax Cost of Debt = 9.1934 %

After Tax Cost of Debt = 9.1934*(1-40%)

After Tax Cost of Debt = 5.52%

Calculate aftertax cost of zero coupon bond:

Before Tax Cost of Debt = rate(nper,pmt,pv,fv)

Nper (indicates the period) = 8

PV (indicates the price) = 68*62%= 42.16 Million

PMT (indicate the semi annual payment) = 0

FV (indicates the face value) = 68 million

Rate (indicates YTM) = ?

Before Tax Cost of Debt = rate(8,0,-42.16,68)

Before Tax Cost of Debt =6.1576 %

After Tax Cost of Debt = 6.1576*(1-40%)

After Tax Cost of Debt = 3.69%

Calculate aftertax cost of debt:

Aftertax cost of debt = 5.52*92.105/(92.105+42.16) + 3.69*42.16/(92.105+42.16)

Aftertax cost of debt = 4.95%

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