Jiminy\'s Cricket Farm issued a 30-year, 7.6 percent semiannual bond 7 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 7.6 percent semiannual bond 7 years ago. The bond currently sells for 86.5 percent of its face value. The book value of this debt issue is $105 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value of this issue is $64 million, and it sells for 60 percent of par. The company’s tax rate is 35 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 7.6 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).)

Jiminy's Cricket Farm issued a 30-year, 7.6 percent semiannual bond 7 years ago. The bond currently sells for 86.5 percent of its face value. The book value of this debt issue is $105 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value of this issue is $64 million, and it sells for 60 percent of par. The company’s tax rate is 35 percent.

Explanation / Answer

a.The total book value of the debt = book value of 7.6% bond + book value of zero coupon bond = 105+ 64 = $169 Million

b.The total market value of the debt = Market value of 7.6% bond + Market value of zero coupon bond = 0.865*105+0.6*64 = $129.225 Million

c. After tax cost of 7.6% bond

For this we need to use excel to calculate the YTM rate which is given by =rate(nper,pmt,pv,fv) where

nper = 30

pmt = 0.076*105 = 7.98

Pv = 86.5% of 105 = 90.825

Fv =105

Hence YTM =rate(30,7.98,-90.825,105) = 8.90%

The tax rate is 35%. hence after tax cost of debt = 8.90*(1-0.35) = 5.785%

d. After tax cost of zero copon bonds

This will be (Face Value/ Current Value)^(1/years to maturity) -1

= (64/38.4)^(1/10) -1 = 0.0524 = 5.24%

After tax cost will be 5.24*(1-0.35) = 3.406%

e. Total cost of debt

Weight of 7.6% bond = 0.865*105/129.225 = 0.7028

Weight of zero coupon bond = 0.2972

Hence cost of debt = 0.7028*5.785 + 0.2972* 3.406 = 5.077% = 5.08%

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.