Jimmy\'s Cricket Farm issued a 15-year. 6 percent semiannual bond 2 years ago. T

Question

Jimmy's Cricket Farm issued a 15-year. 6 percent semiannual bond 2 years ago. The bond currently sells for 95 percent of its face value The company's tax rate is 40 percent. Suppose the book value of the debt issue is $60 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 $35 million, and the bonds sell for 51 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))

Explanation / Answer

book value of the debt = 60 million + 35 million = 95 million

Market value of debt =

old debt ,market value new debt market value Market value of debt 57000000 17850000 74850000 book value of debt 60000000 market value of debt 57000000 Interest 3600000 years 13 interest + (RV -MV)/years to maturity (RV - MV) / 2 before tax cost of debt after tax cost of debt cost of debt interest + (RV -MV)/years to maturity / (RV - MV) / 2 3830769 58500000 0.0654832 0.039289941 3.928994 percent cost of zero coupon bond can not be calculated as YTM on the bond is not given

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