Points awarded based off showing work and correctness. Jiminy\'s Cricket Farm is
ID: 2707045 • Letter: P
Question
Points awarded based off showing work and correctness.
Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 6 years ago. The bond currently sells for 89 percent of its face value. The book value of the debt issue is $22 million. The company's tax rate is 34 percent, and the bond has a YTM of 8.04%.
In addition, the company has a second debt issue on the market, a zero coupon bond with 6 years left to maturity; the book value of this issue is $79 million and the bonds sell for 73 percent of par.
1. What is the company's total market value of debt?
2. What is your best estimate of the aftertax cost of debt?
a. 4.51%
b. 3%
c. 3.96%
d. 4.3%
e. 3.77%
Points awarded based off showing work and correctness.
Jiminy's Cricket Farm issued a 30-year, 7 percent semi-annual bond 6 years ago. The bond currently sells for 89 percent of its face value. The book value of the debt issue is $22 million. The company's tax rate is 34 percent, and the bond has a YTM of 8.04%.
In addition, the company has a second debt issue on the market, a zero coupon bond with 6 years left to maturity; the book value of this issue is $79 million and the bonds sell for 73 percent of par.
1. What is the company's total market value of debt?
2. What is your best estimate of the aftertax cost of debt?
a. 4.51%
b. 3%
c. 3.96%
d. 4.3%
e. 3.77%
Explanation / Answer
1. Market value of 1st bond =89%*22= 19.58 million
Market value of 2nd bond =73%*79= 57.67 million
company's total market value of debt=$77.25 million
2. YTM of zero coupon bond
73%*79 = 79/(1+YTM)^6
YTM = 5.39%
aftertax cost of debt =(1-34%)*( 5.39%*57.67 + 8.04%*19.58)/(77.25) = 3.96%
c. 3.96%