Jiminy’s Cricket Farm issued a 15-year, 6 percent semiannual bond 2 years ago. T

Question

Jiminy’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?

What is the company’s total market value of debt?

What is your best estimate of the aftertax cost of debt?

Jiminy’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.

Explanation / Answer

Jimmy's 15 years bond= book value =$ 60m   

Zero coupon book value =$ 35m

total book value of the debt= $ 60m+$ 35m=$ 95m

market value of 15 years bond= book value $ 60 m trading at 95% of face value = 60m*95%=$ 57m

market value of Zero coupon bond = 35m*51%=17.85

so total market value of debt= $ 57m+$ 17.85m=$ 74.85m

cost of debt= C/2+(F-P/n*2)/F+P/2

60/2+(100-95)/15*2)/100+95/2

30+0.17/97.5=30.94

tax= 40% after tax cost of debt= 30.94(1-Tax) 30.94*.60=18.56%

bonds book value is the bonds face value ,so the market value = 60*95%= $ 57 m

market value of Zero coupon bond =35m selling at 51% of face value = 35*51%= 17.85m

total market value of DEBT= $ 57m+$17.85m=$ 74.85m

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