Jiminy\'s Cricket Farm issued a 30-year, 7 percent semi-annual bond 6 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 6 years ago. The bond currently sells for 88 percent of its face value. The book value of the debt issue is $18 million. The company's tax rate is 32 percent. In addition, the company has a second debt issue on the market, a zero coupon bond with 6 years left to maturity; the book value of this issue is $78 million and the bonds sell for 73 percent of par.

What is your best estimate of the aftertax cost of debt?

What is your best estimate of the aftertax cost of debt?

Explanation / Answer

Jiminy's Cricket Farm All Amounts in $ million (at book value) Particulars Amount Cost Post Tax Weighted of Debt Cost Debt 7% Semi-Annual Bonds 18 7% 4.7600% 0.8568 Zero Coupon Bonds 78 0% 0.0000% 0 Total 96 0.8568 Thus, the total after-tax cost of debt will be $ 0.8568 / $ 96 = 0.89%

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