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 $15 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 $78 million and the bonds sell for 74 percent of par.

choices:

111,900,000

70,620,000

74,100,000

111,120,000

93,000,000

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

choices:

67,089,000

74,151,000

70,620,000

73,444,800

93,000,000

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

choices:

5.89%

4.96%

5.22%

3.89%

5.61%

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 $15 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 $78 million and the bonds sell for 74 percent of par.

Explanation / Answer

Book value of debt = 78 million +15 million i.e 93000000

Market value of debt = ( 78*0.74)+(15*0.86) i.e 70620000

After tax cost of debt = 7(1-0.33) i.e 4.69%

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