Jiminy\'s Cricket Farm issued a 30-year, 7.2 percent semiannual bond 7 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 7 years ago. The bond currently sells for 91.5 percent of its face value. The book value of this debt issue is $95 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value of this issue is $65 million, and it sells for 55 percent of par. The company’s tax rate is 35 percent.

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

%

Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 7 years ago. The bond currently sells for 91.5 percent of its face value. The book value of this debt issue is $95 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value of this issue is $65 million, and it sells for 55 percent of par. The company’s tax rate is 35 percent.

Explanation / Answer

Face value (FV) $                                  1,000.00 Coupon rate 7.20% Number of compounding periods per year 2 Interest per period (PMT)                                            36.00 Bond price (PV) $                                   (915.00) Number of years to maturity 23 Number of compounding periods till maturity (N) 46 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 8.01% (Pre-tax cost of debt) Bond Yield to maturity 5.21% (After-tax cost of debt) 8.01%*(1-35%) Face value (FV) $                                  1,000.00 Coupon rate 0.00% Number of compounding periods per year 2 Interest per period (PMT)                                                   -   Bond price (PV) $                                   (550.00) Number of years to maturity 10 Number of compounding periods till maturity (N) 20 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 6.07% (Pre-tax cost of debt) Bond Yield to maturity 3.94% (After-tax cost of debt) 6.07%*(1-35%) Market value Weights After tax cost of debt Weighted cost Debt 1 $            86.93         0.71 5.21% 3.69% Zero coupon bond $            35.75         0.29 3.94% 1.15% $          122.68 After tax cost of debt 4.84%

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