Jiminy’s Cricket Farm issued a 20-year, 6 percent semiannual bond 2 years ago. T
ID: 2750804 • Letter: J
Question
Jiminy’s Cricket Farm issued a 20-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 percent.
Suppose the book value of the debt issue is $40 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is $40 million, and the bonds sell for 52 percent of par.
What is the company’s total book value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is your best estimate of the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16))
Jiminy’s Cricket Farm issued a 20-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 percent.
Suppose the book value of the debt issue is $40 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is $40 million, and the bonds sell for 52 percent of par.
Explanation / Answer
1)
first issue book value of debt = $40,000,000
second issue book value of debt = $40,000,000
total book value of debt = $80,000,000
2)
first issue : $40,000,000 at 92% par value of bond
second issue : $40,000,000 at 52% par value of bond
total market value = $40,000,000 *0.92 + $40,000,000*0.52
total market value of debt = $57,600,000
or
company’s total book value of debt
80,000,000.00
(40M+40M)
company’s total market value of debt
57,600,000.00
(40M*92%) + (40M*52%)
aftertax cost of debt
A
C
1
FV
1000
2
PURCHASE PRICE
920
3
RATE
6.00%
4
PAYMENT FREQUENCY
2
5
YEAR TO MATURITY
18
6
PREMIUM
0%
7
YTM
6.78%
RATE(B6*B5,B4/B5*B2,-B3,B2*(1+B7))*B5
after tax rate = 6.78 * (1-.40)
4.068
company’s total book value of debt
80,000,000.00
(40M+40M)
company’s total market value of debt
57,600,000.00
(40M*92%) + (40M*52%)
aftertax cost of debt
A
C
1
FV
1000
2
PURCHASE PRICE
920
3
RATE
6.00%
4
PAYMENT FREQUENCY
2
5
YEAR TO MATURITY
18
6
PREMIUM
0%
7
YTM
6.78%
RATE(B6*B5,B4/B5*B2,-B3,B2*(1+B7))*B5
after tax rate = 6.78 * (1-.40)
4.068
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