Jiminy’s Cricket Farm issued a 20-year, 8 percent semiannual bond 3 years ago. T

Question

Jiminy’s Cricket Farm issued a 20-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 96 percent of its face value. The company’s tax rate is 35 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 10 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, 8 percent semiannual bond 3 years ago. The bond currently sells for 96 percent of its face value. The company’s tax rate is 35 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 10 years left to maturity; the book value of this issue is $40 million, and the bonds sell for 52 percent of par.

Explanation / Answer

Solution.

A. Total book value of bond.

Total book value of bond. = $80 million.

B.   Total market value of bond.

  Total market value of bond =

Genral bond = $40 million x 96% = 38.40 million

Zero coupon Bond = $40 million x 52% = 20.80 million

Total = 59.20 million

C. Cost of debt

Cost of debt = 8% x 65% = 5.2%.

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