Jiminy’s Cricket Farm issued a 15-year, 10 percent semiannual bond 4 years ago. The bond currently sells for 91 percent of its face value. The company’s tax rate is 38 percent. Suppose the book value of the debt issue is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 11 years left to maturity; the book value of this issue is $35 million, and the bonds sell for 51 percent of par. What is the company’s total book value of debt? (Enter your answer in dollars, not millions of dollars, i. e. 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, i. e. 1,234,567.) Total market value $ What is your best estimate of the aftertax cost of debt? (Round your answer to 2 decimal places. (e. g., 32.16)) Cost of debt %

Find the answers below

Explanation:

The total book value of the debt is the sum of the two bonds book values

total book value=$60 million+$35 million=$95 million

Total market value of bonds is the sum of the two bonds market values

total market values=$60 million*91%+$35 million*51%

                                =$54.6  million+$17.85  million=$72.45  million

After tax cost of debt =pretax cost of debt*(1-t) where t is the tax rate of 38% or 0.38

For the first bond:

=rate(nper,pmt,-pv,fv)

nper is the number of interest the bonds would pay from now on,i.e (15-4)*2=22

pmt is the semiannual interest payment,which is:$60 million*10%/2=$3 million

pv is the market value of $54.6 million

fv is the book value of $60 million

=rate(22,3,-54.6,60)=5.73%

5.73%  is the semiannual rate ,where 11.46% is the annual rate

after tax cost of debt=11.46%*(1-0.38)=7.11%

the second bond:

nper is 11 (11 years left to maturity)

pmt is nil since it is a zero coupon bond

pv is $17.85 million

fv is $35 million

=rate(11,0,-17.85,35)=6.31%

after tax cost of debt=6.31% *(1-0.38)=3.91%

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