Jiminy\'s Cricket Farm issued a 30-year, 7.2 percent semiannual bond 5 years ago

Question

Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 5 years ago. The bond currently sells for 89.5 percent of its face value. The book value of this debt issue is $99 million. In addition, the company has a second debt issue, a zero coupon bond with 8 years left to maturity; the book value of this issue is $69 million, and it sells for 57 percent of par. The company’s tax rate is 40 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 debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

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).)

Explanation / Answer

Requirement 1:

What is the total book value of debt?

Ans) Book value of 30-year, 7.2 percent semiannual bond + Book value of the Zero Coupon Bond

= 99 m + 69m

= $168 m

= $1680,00,000

..

..

.

Requirement-2:-

..

Total Maerket Value of the Debt = Market value of 30-year, 7.2 percent semiannual bond + Marketvalue of the Zero Coupon Bond

= 100m*95% + 100m*57%

= 95m + 57m

= $152 m

..

..

Requirement 3:

What is the aftertax cost of debt?

YTM of Coupon Bond (Semi-annual) = 3.83%

Therefore, YTM of Coupon Bond (Semi-annual) = 3.83%*2

= 7.66%

After Tax cost of Coupon Bearing Bond = 7.66*0.6

= 4.60%

YTM of Zero Coupon Bond = 7.28%

Aftet tax cost of Zero Coupon Bond = 7.28*0.6

= 4.37%

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