Jiminy’s Cricket Farm issued a 20-year, 10 percent semiannual bond 4 years ago.
ID: 2714238 • Letter: J
Question
Jiminy’s Cricket Farm issued a 20-year, 10 percent semiannual bond 4 years ago. The bond currently sells for 97 percent of its face value. The company’s tax rate is 38 percent.
Suppose the book value of the debt issue is $40 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 11 years left to maturity; the book value of this issue is $40 million, and the bonds sell for 52 percent of par.
What is the company’s total book value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is your best estimate of the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16))
Jiminy’s Cricket Farm issued a 20-year, 10 percent semiannual bond 4 years ago. The bond currently sells for 97 percent of its face value. The company’s tax rate is 38 percent.
Suppose the book value of the debt issue is $40 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 11 years left to maturity; the book value of this issue is $40 million, and the bonds sell for 52 percent of par.
Explanation / Answer
total book value of debt = 40 million + 40 million
= 80 million
= 80,000,000
total market value of debt
= 0.97 * 40million + 0.52 * 40million
=59,600,000
970 = 50 * [1-(1+YTM/2)ˆ-40]/YTM/2 + 1000/(1+YTM/2)ˆ40
YTM = 10.36
cost of zero coupon bond
520 = 1000/(1+r)ˆ20
=>
r = 3.32%
after tax cost of debt
= (10.36% + 3.32%)/2 * (1-0.38)
= 4.24%
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