Jiminy's Cricket Farm issued a 30-year, 6.3 percent semiannual bond eight years ago. The bond currently sells for 110 percent of its face value. The book value of the debt issue is $135 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $65 million, and it sells for 64.3 percent of par. The company's tax rate is 22 percent.

a. What is the total book value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e. g., 1,234,567.)

b. What is the total market value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e. g., 1,234,567.)

c. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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

30 year bond;

Number: 135,000,000/1000 = 135,000 bonds

Market value = 1.10 * 1000 * 135,000 = $148,500,000

Zero-coupon bond;

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;

30 year bond;

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)

Zero-coupon bond;

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%