Jiminy’s Cricket Farm issued a 25-year, 12 percent semiannual bond 3 years ago.
ID: 2718701 • Letter: J
Question
Jiminy’s Cricket Farm issued a 25-year, 12 percent semiannual bond 3 years ago. The bond currently sells for 94 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 14 years left to maturity; the book value of this issue is $45 million, and the bonds sell for 53 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 25-year, 12 percent semiannual bond 3 years ago. The bond currently sells for 94 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 14 years left to maturity; the book value of this issue is $45 million, and the bonds sell for 53 percent of par.
Explanation / Answer
What is the company’s total book value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Total book value = book value of the coupon bond + book value of the Zero coupon bond
Total book value = 40000000 + 45000000
Total book value = $ 85,000,000
What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Market Value of Coupon Bond = 40000000*94% = $ 37,600,000
Market Value of zero Coupon Bond = 45,000,000*53% = $ 23,850,000
Total Market Value = Market Value of Coupon Bond + Market Value of zero Coupon Bond
Total Market Value = 37,600,000 + 23,850,000
Total Market Value = 61,450,000
What is your best estimate of the aftertax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16))
Coupon Bond
Before Tax Cost of Debt = rate(nper,pmt,pv,fv)
Nper (indicates the semi annual period) = (25-3)*2 = 44
PV (indicates the price) = 1000*94% = 940
PMT (indicate the semi annual payment) = 1000*12%*1/2 = 60
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = ?
Before Tax Cost of Debt = rate(44,60,-940,1000)*2
Before Tax Cost of Debt = 12.82%
After Tax Cost of Debt =12.82*(1-38%)
After Tax Cost of Debt = 7.95%
Zero Coupon Bond
Before Tax Cost of Debt = rate(nper,pmt,pv,fv)
Before Tax Cost of Debt = rate(14,0,-530,1000)
Before Tax Cost of Debt = 4.64 %
After Tax Cost of Debt = 4.64*(1-38%)
After Tax Cost of Debt = 2.88%
Cost of debt = Weight of CouponBond* After Tax cost of Coupon Bond + Weight of Zero CouponBond* After Tax cost of Zero Coupon Bond
Cost of debt = 376/614.5 * 7.95 + 238.5/614.5 *2.88
Cost of debt = 5.98%
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