Pearce’s Cricket Farm issued a 20-year, 10% semiannual bond 2 years ago. The bond currently sells...

Pearce’s Cricket Farm issued a 20-year, 10% semiannual bond 2 years ago. The bond currently sells for 93% of its face value. The company’s tax rate is 35%.

Suppose 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 13 years left to maturity; the book value of this issue is $40 million and the bonds sell for 52% of par. Assume the par value of the bond is $1,000.

What is the company’s total book value of debt? (Enter the answer in dollars. Omit $ sign in your response.)

Total book value $

What is the company’s total market value of debt? (Enter the answer in dollars. Omit $ sign in your response.)

Total market value $

What is your best estimate of the after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.)

Cost of debt %

Solutions

Expert Solution

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

Total Book Value of Debt = $50000000 + 40000000

Total Book Value of Debt = $90000000

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

Total Market Value of Debt = Face Value * Market rate + face Value * Market rate

Total Market Value of Debt = $50 M * 93% + $40 M * 52%
Total Market Value of Debt = $67300000

After Tax Cost of Debt = 5.93%

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jeff jeffy answered 1 year ago

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