Jiminy's Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 4 percent 3 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 22 percent. The book value of the debt issue is $30 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years left to maturity; the book value of this issue is $15 million, and the bonds sell for 73 percent of par. a. What is the company's total book value of debt? (Enter your answer in dollars, not millions of dollars, e. g. 1,234,567.) b. What is the company's total market value of debt? (Enter your answer in dollars, not millions of dollars, e. g. 1,234,567.) c. What is your best estimate of the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Question

Anika Hood

Business

10 October, 20:31

Jiminy's Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 4 percent 3 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 22 percent. The book value of the debt issue is $30 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years left to maturity; the book value of this issue is $15 million, and the bonds sell for 73 percent of par. a. What is the company's total book value of debt? (Enter your answer in dollars, not millions of dollars, e. g. 1,234,567.) b. What is the company's total market value of debt? (Enter your answer in dollars, not millions of dollars, e. g. 1,234,567.) c. What is your best estimate of the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Kolby Huang · Answer 1

a. What is the pre-tax cost of debt? This question is basically asking for the bond's current yield to maturity, which is the pre-tax cost of long term debt in the capital markets for this company today. Price = 1.08 * 1000 = 1080+ / - PV23 * 2 = 46 N. 10 * 1000 = 100 / 2 = 50 PMT1000 FVSolve for i/y = 4.5801 is the semi-annual yield to maturity * 2 = 9.1601% annual YTM

b. What is the after-tax cost of debt?9.1601 * (1 -.35) = 5.9541 after tax cost of debt. This is the true cost of debt to the company because the company gets a tax deduction (a tax shield!) for paying interest on its debt.