Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual c
ID: 2764598 • Letter: J
Question
Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon rate of 6 percent 4 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 40 percent. The book value of the debt issue is $45 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 15 years left to maturity; the book value of this issue is $50 million, and the bonds sell for 54 percent of par.
What is the company’s total book value of debt? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)
Total book value $ What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)
Total market value $
What is your best estimate of the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Cost of debt %
Explanation / Answer
a. Book value of debt = 45 + 50 = 95 Million = 95,000,000
b. Market Value of debt 1 = 0.95*45 = 42,750,000
Market Value of debt 2 = 0.54*50 = 27,000,000
Total market value = 42,750,000 + 27,000,000 = 69,750,000
c. Market Value weight of debt 1 = Wd1 = 42.75/69.75 = 0.6129
Market Value weight of debt 2 = Wd2 = 1=0.6129 = 0.3871
Cost of debt 1(pretax) = YTM =rate(nper,pmt,pv,fv) =rate(26*2,60/2,-950,1000) * 2 = 6.3971%
Cost of debt 1(post tax) = 6.3971*(1-tax rate) = 6.3971*(1-0.4) = 3.83826%
Cost of debt 2 (pretax) = (F/PV)^(1/n) -1 = (100/54)^(1/15)-1 = 4.19345%
Cost of debt 2 (after tax) = 4.19345*(1-0.4) = 2.5161%
So After tax cost of debt = 0.6129* 3.83826 + 0.3871*2.5161 = 3.3264%
Csot of debt = 3.33%
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