Ass 31213.1184 Ch 12 Homework Jiminy\'s Cricket Farm issued a 30-year, 7.6 perce

Question

Ass 31213.1184 Ch 12 Homework Jiminy's Cricket Farm issued a 30-year, 7.6 percent semiannual bond 9 years ago. The bond currently sells for 90.5 percent of its face value. The book value of this debt issue is $97 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $67 million, and it sells for 56 percent of par. The company's tax rate is 30 percent. Required 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).) Total book value of debt 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).) Total market value 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).) Aftertax cost of debt 6.01 % 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).) Aftertax cost of debt 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).) Aftertax cost of debt renceseBook &Resources; Diffculty: Basic Worksheet

Explanation / Answer

1) Total Book Value of Debt = Book value of semiannual bond + Book value of zero coupon bond
=> $97 million + $67 million = $164 million

2) Total Market Value of Debt = ($97 million x 90.5%) + ($67 million x 56%) = $125.305 million

3) The after-tax cost of debt would be after-tax Yield to Maturity of the bond. So, we first need to calculate the YTM of the bond in excel using below function.

After-tax cost of debt = rate(nper,pmt,pv,fv)*2 * (1-tax rate)

After-tax cost of semiannual Bond = rate(42,36,-905,1000)*2*(1-30%)
=> 0.0601 or 6.01%

4) After-tax cost of zero coupon bond = rate(nper,pmt,pv,fv)* (1-tax rate)

After-tax cost of zero coupon bond = rate(12,0,-560,1000)*(1-30%)
=> 0.03465 or 3.47%

5) After-tax cost of debt = (After-tax cost of semiannual bond * Proportion of semiannual bond in debt) + (After-tax cost of zero coupon bond * Proportion of zero coupon bond in debt)

Proportion of Semiannual bond = ($97 million x 90.5%) / $125.305 million
=> $87.785 million / $125.305 million = 0.700570608

Proportion of Zero coupon bond = ($67 million x 56%) / $125.305 million
=> $37.52 million / $125.305 million = 0.299429392

After-tax cost of debt = (0.700570608*0.0601) + (0.299429392*0.03465)
=> 0.042104294 + 0.010376185 = 0.052480478 or 0.0525 or 5.25%

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