Suspect Corp. issued a bond with a maturity of 30 years and a semiannual coupon
ID: 2547155 • Letter: S
Question
Suspect Corp. issued a bond with a maturity of 30 years and a semiannual coupon rate of 6 percent 4 years ago. The bond currently sells for 95 percent of its face value. 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. The company’s tax rate is 40 percent.
What is the company’s total book value of debt? (Do not round intermediate calculations. 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? (Do not round intermediate calculations. 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
(1): What is the company’s total book value of debt?
Answer: Total book value of Debt: 45 + 50 = $95 Million
Total book value of Debt = 95000000
(2): What is the company’s total market value of debt?
Total market value of Debt: (45 M * .95) + (50 M *.54) = $69.75 Million
Total market value of Debt = 69750000
(3): What is your best estimate of the aftertax cost of debt?
Computation of YTM of Bond-
YTM =[ C + (F-P) / n] / (F+P)/2
Given: Mode= Semiannual, F = $1000, C: 1000*6%*1/2 = $30, n: (30-4) 26 *2 = 52 periods, P = $950
YTM = [30 + (1000-950) / 52] / (1000+950)/2
YTM: 3.20 * 2 = 6.40% (Annual)
YTM = 6.40%
Cost of Zero coupon bonds: 4.19% (after calculation)
Total cost of bond as per weights = (45 / 95) * 6.40 + (50/95) * 4.19 = 5.24%
After tax cost of debt = Rd (1-Tc)
After tax cost of debt = 5.24% (1-.40)
After tax cost of debt = 3.14%
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