Question
In: Finance
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
3. 
After Tax Cost of Debt = 5.93%
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jeff jeffy answered 1 year agoRelated Solutions
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