Jiminy\'s Cricket Farm issued a 30-year, 7 percent semiannual bond 6 years ago.

Question

Jiminy's Cricket Farm issued a 30-year, 7 percent semiannual bond 6 years ago. The bond currently sells for 90 percent of its face value. The book value of this debt issue is $98 million. In addition, the company has a second debt issue, a zero coupon bond with 9 years left to maturity; the book value of this issue is $68 million, and it sells for 56.5 percent of par. The company’s tax rate is 38 percent.

What is the total book value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

What is the total market value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

What is the aftertax cost of the 7 percent coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the aftertax cost of the zero coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the total book value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Explanation / Answer

Jiminy's Cricket Farm issued a 30-year, 7 percent semiannual bond 6 years ago. The bond currently sells for 90 percent of its face value. The book value of this debt issue is $98 million. In addition, the company has a second debt issue, a zero coupon bond with 9 years left to maturity; the book value of this issue is $68 million, and it sells for 56.5 percent of par. The company’s tax rate is 38 percent.

Required

What is the 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 of debt = Book Value of Coupon Bond + Book Value of Zero Coupon Bond

Total book value of debt = 98 + 68

Total book value of debt = $ 166 Million

What is the total market value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Market Value of coupon bond = 98 Million * 90%

Market Value of coupon bond = $ 88.20 Million

Market Value of zero coupon bond = 68 Million * 56.5%

Market Value of zero coupon bond = $ 38.42 Million

Total market value = Market Value of coupon bond + Market Value of zero coupon bond

Total market value = 88.20 + 38.42

Total market value = $ 126.62 Million

What is the aftertax cost of the 7 percent coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Aftertax cost of debt = rate(nper,pmt,pv,fv)*2 * (1-tax rate)

Aftertax cost of debt = rate(30*2,35,-900,1000)*2*(1-38%)

Aftertax cost of debt = 4.88%

What is the aftertax cost of the zero coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Aftertax cost of debt = rate(nper,pmt,pv,fv)*2 * (1-tax rate)

Aftertax cost of debt = rate(9*2,0,-565,1000)*2*(1-38%)

Aftertax cost of debt = 4.00%

What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Aftertax cost of debt = Weight of Coupon Bond * Aftertax cost of debt of Coupon Bond + Weight of Zero Coupon Bond * Aftertax cost of debt of Zero Coupon Bond

Aftertax cost of debt = 88.20/126.62*4.88 + 38.42/126.62 * 4

Aftertax cost of debt = 4.61%

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