Jiminy\'s Cricket Farm issued a 30-year, 8 percent semi-annual bond 6 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 8 percent semi-annual bond 6 years ago. The bond currently sells for 86 percent of its face value. The book value of the debt issue is $16 million. The company's tax rate is 35 percent.

In addition, the company has a second debt issue on the market, a zero coupon bond with 6 years left to maturity; the book value of this issue is $83 million and the bonds sell for 76 percent of par.

Jiminy's Cricket Farm issued a 30-year, 8 percent semi-annual bond 6 years ago. The bond currently sells for 86 percent of its face value. The book value of the debt issue is $16 million. The company's tax rate is 35 percent.

In addition, the company has a second debt issue on the market, a zero coupon bond with 6 years left to maturity; the book value of this issue is $83 million and the bonds sell for 76 percent of par.

Explanation / Answer

Answer:a Total book value of Debt:

The book value of debt is the total par value of all outstanding debt, so:

BV D = $16,000,000 + 83,000,000

BV D = $99,000,000

Answer:b Market value of Debt:To find the market value of debt, we find the price of the bonds and multiply by the number of bonds. Alternatively, we can multiply the price quote of the bond times the par value of the bonds. Doing so, we find:

MV D = .860($16,000,000) + .76($83,000,000)

MV D = =13760000+63080000=$76840000

Answer:c The YTM of the coupon bonds is:

P = $860 = $40(PVIFA R %,48 ) + $1,000(PVIF R %,48 )

R = 4.74% (semiannually)

YTM = 9.48% (annually)

The aftertax cost of debt is:

R D = .0948(1 - .35)

R D = 6.162%

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