Question

Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon rate of 6 percent 3 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 40 percent. The book value of the debt issue is $50 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 $50 million, and the bonds sell for 54 percent of par.

What is the company’s total book value of debt? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

Total book value

$

What is the company’s total market value of debt? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

Total market value

$

What is your best estimate of the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of debt

%

Answer 1

1. Total Book Value of Debt = First Debt Book Value + Second Debt Book Value

Total Book Value of Debt = $50 M + $50 M

Total Book Value of Debt = $100,000,000

2. Total Market Value of Debt = First Debt Market Value + Second Debt Market Value

Total Market Value of Debt = $50 M * 92% + $50 M * 54%

Total Market Value of Debt = $73,000,000

3. After Tax Cost of Debt = 4.85%

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