Jiminy’s Cricket Farm issued a 20-year, 6 percent semiannual bond 2 years ago. T

Question

Jiminy’s Cricket Farm issued a 20-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 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 12 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, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 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 12 years left to maturity; the book value of this issue is $40 million, and the bonds sell for 52 percent of par.

Explanation / Answer

1. Total book value of debt is = $80,000,000

2. Market value of debt is :

40,000,000*92% = $36,800,000

40,000,000*52% = $20,800,000

Total $57.600,000

3. After tax cost of debt = 6%*(100%-40%) = 3.6%

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