Jiminy\'s Cricket Farm issued a 30-year, 7 percent semi-annual bond 4 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 4 years ago. The bond currently sells for 86 percent of its face value. The book value of the debt issue is $24 million. The company's tax rate is 33 percent.

In addition, the company has a second debt issue on the market, a zero coupon bond with 4 years left to maturity; the book value of this issue is $84 million and the bonds sell for 76 percent of par.

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

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

Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 4 years ago. The bond currently sells for 86 percent of its face value. The book value of the debt issue is $24 million. The company's tax rate is 33 percent.

In addition, the company has a second debt issue on the market, a zero coupon bond with 4 years left to maturity; the book value of this issue is $84 million and the bonds sell for 76 percent of par.

Explanation / Answer

Book value Market value Market value weights After tax cost Weighted cost Debt 1 $        24.00 $            20.64                                     0.24 5.58% 1.36% Debt 2 $        84.00 $            63.84                                     0.76 4.68% 3.53% $            84.48                                     1.00 After tax cost of debt 4.90%

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