Jiminy\'s Cricket Farm issued a 30-year, 7 percent semi-annual bond 5 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 5 years ago. The bond currently sells for 81 percent of its face value. The book value of the debt issue is $23 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 5 years left to maturity; the book value of this issue is $78 million and the bonds sell for 74 percent of par. Required: (a) What is the company's total book value of debt? b)companys total market value of debt? c)your best estimate of aftertax cost of debt?

Explanation / Answer

(a) What is the company's total book value of debt?

30 Year Bond@7% - $23,000,000

Zero Coupan Bond - $78,000,000, So total Book Value is ($23,000,000 + $$78,000,000) = $101,000,000

b) companys total market value of debt?

30 Year Bond@7% - $23,000,000 market value is 81% = $18,630,000

Zero Coupan Bond - $78,000,000 market value is 74% = $57,720,000

So total market Value is ($18,630,000 + $57,720,000) = $76,350,000

c) your best estimate of aftertax cost of debt?

Interest of Semi Annual Bond = $23,000,000 * 3.5% * 2 = $1,610,000

Aftertax Cost of Debt = $1,610,000 (1 - 0.33) =$1,078,700

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