Answer:
Explanation:
a.)
Book value of debt is the debt amount in Jiminy's Cricket Farm's balance sheet on the liabilities section. Total book value of debt is calculated by be the summing up of the book values of the two bonds this company has.
Book value of 30 year bond = $135,000,000
Book value of the Zero-coupon bond = $65,000,000
Total book value of debt = $135 + $65 = $200,000,000
b.)
Total market value of debt will be the sum of market values of the two bonds this company has. It is calculated by multiplying the current price of the bond by the number of outstanding bonds.
market value = Price * number of bonds
<u>30 year bond;</u>
Number: 135,000,000/1000 = 135,000 bonds
Market value = 1.10 * 1000 *135,000 = $148,500,000
<u>Zero-coupon bond;</u>
Number: 65,000,000/1000 = 65,000 bonds
Market value = 0.643 * 1000 *65,000 = $41,795,000
Total market value of debt = $148,500,000 + $41,795,000 = $190,295,000
c.)
Aftertax cost of debt is the adjusted interest rate paid on debt because of the benefit of tax shield due to leverage. Since there are two bonds, find the average of the two rates to get after tax cost of debt.
You can find the Pretax cost of debt first. Using a financial calculator, input the following;
<u>30 year bond;</u>
N = 30*2 = 60
PV = -148,500,000
PMT = (6.3%/2)* $135,000,000 = 4,252,500
FV = $135,000,000
then compute semiannual rate; CPT I/Y = 2.804%
Convert to annual rate = 5.607% (this is the pretax cost of debt)
<u>Zero-coupon bond;</u>
N = 12
PV = -$41,795,000
PMT = 0
FV = $65,000,000
then CPT I/Y = 3.749% (this is the pretax cost of debt)
Next, find the average pretax cost of debt = (5.607% + 3.749%) /2 = 4.678%
After tax cost of debt = pretax cost of debt (1-tax)
After tax cost of debt = 4.678% (1-0.22) = 3.65%
