Jiminy\'s Cricket Farm issued a 30-year, 8 percent semi-annual bond 4 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 8 percent semi-annual bond 4 years ago. The bond currently sells for 94 percent of its face value. The book value of the debt issue is $22 million. The company's tax rate is 34 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 $77 million and the bonds sell for 77 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, 8 percent semi-annual bond 4 years ago. The bond currently sells for 94 percent of its face value. The book value of the debt issue is $22 million. The company's tax rate is 34 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 $77 million and the bonds sell for 77 percent of par.

Explanation / Answer

(a) The Company's total book value of debt = $ 22 million + $ 77 million = $ 99 million or $ 99,000,000. (b) Market Value of 8% Semi-annual Bonds = $ 22 million X 94% = $ 20.68 million Market Value of 0 Coupon Bonds = $ 77 million X 77% = $ 59.29 million Total Market Value of the Bonds = $ 79.97 million or $ 79,970,000. (c) Debt Cost of 8% semi-annual bonds = 1760000 $ Debt Cost of Zero Coupon Bonds = 0 $ Pre Tax Cost of Debt 1760000 $ Income Tax Impact @ 34% 598400 $ Post Tax Cost of Debt 1161600 $

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.