Jiminy\'s Cricket Farm issued a 30-year, 6 percent semi-annual bond 5 years ago.
ID: 2769177 • Letter: J
Question
Jiminy's Cricket Farm issued a 30-year, 6 percent semi-annual bond 5 years ago. The bond currently sells for 93 percent of its face value. The book value of the debt issue is $18 million. The company's tax rate is 33 percent. In addition, the company has a second debt issue on the market, a zero coupon bond with 5 years left to maturity; the book value of this issue is $80 million and the bonds sell for 78 percent of par.
What is the company's total market value of debt? (Do not round your intermediate calculations.)
What is your best estimate of the aftertax cost of debt? (Do not round your intermediate calculations.)
(a) What is the company's total book value of debt? (Do not round your intermediate calculations.) (Click to select)120,000,00076,000,00098,000,000119,200,00079,140,000Explanation / Answer
a. Total book value of the debt = 18 + 80 = 98 Million = 98,000,000
b. market Value of debt = 18*0.93 + 80*0.78 = 79.14 Million = 79,140,000
c. pretax cost of debt 1 =rate(nper,pmt,pv.fv) = rate(30*2,60/2,-930,1000) = 3.2676%
Annual pretax cost = 3.2676*2 = 6.5352%
After tax cost of debt 1 = 6.5352*(1-0.33) = 4.38%
The preatx cost the zero bond =(F/PV)^(1/n)- 1 =(1000/780)^(1/5)-1 = 5.0948%
After tax cost of zero bond = 5.0948*(1-0.33) = 3.4135% = 3.41%
Weight of bond 1 = 18*0.93/79.14 = 0.2115
Weight of zero bond = 1-0.2115 = 07885
Hence after tax cost of debt = 0.2115 * 4.38 + 0.7885*3.41 = 3.62%
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