Jiminy\'s Cricket Farm issued a 30-year, 7.2 percent semiannual bond 7 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 7 years ago. The bond currently sells for 91.5 percent of its face value. The book value of this debt issue is $95 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value of this issue is $65 million, and it sells for 55 percent of par. The company

Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 7 years ago. The bond currently sells for 91.5 percent of its face value. The book value of this debt issue is $95 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value of this issue is $65 million, and it sells for 55 percent of par. The company

Explanation / Answer

1. The total book value of the bond is 95+ 65 = 160 million = 160,000,000

2. Market Value of Debt = 95*0.915 + 65*0.55 = 122.68 million = 122,680,000

3.

8.01%

So after cost of Debt is (8.01)*(1-0.35)=5.21%

4.

So after tax cost of zero -coupon bond is 6.16*(1-0.35) = 4.00%

5. Weightage of coupon bond = 95*0.915/(95*0.915+65*0.55) = 0.709

Weigtage of Zero coupon bond = 1-0.709 = 0.291

After Tax cost of debt = 0.291*4 +0.709*5.21 = 4.86%

Face Value 100 Market Value 91.5 Coupon Payment 3.6 Frequncy 2 Maturity 23 YTM

8.01%

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