Homework Help: Finance
Posted by Sally on Monday, November 23, 2015 at 8:02pm. The answer given by Finance - Anonymous , Monday, November 23, 2015 at 8:12pm
Add the tax to the "before tax" to get the answer was not helpful. I am hoping someone can give me a guided answer. Thank you.
Jiminy's Cricket Farm issued a 30-year, 7.2 percent semiannual bond 6 years ago. The bond currently sells for 87.5 percent of its face value. The book value of this debt issue is $103 million. In addition, the company has a second debt issue, a zero coupon bond with 9 years left to maturity; the book value of this issue is $62 million, and it sells for 59 percent of par. The company’s tax rate is 38 percent.
Total book value of debt $
165,000,000
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).)
Total market value $
126705000
What is the aftertax cost of the 7.2 percent coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Aftertax cost of debt
5.22
%
What is the aftertax cost of the zero coupon bond? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Aftertax cost of debt
3.68
%
What is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Aftertax cost of debt
%
I answered all other questions, stuck on the "After tax cost of debt" need help.•
To calculate the aftertax cost of debt, you need to consider the tax advantage of the interest expense. The formula to calculate the aftertax cost of debt is as follows:
Aftertax cost of debt = Before tax cost of debt x (1 - Tax rate)
1. Calculate the before tax cost of debt for the 7.2% coupon bond:
The bond currently sells for 87.5% of its face value, so the market value of the bond can be calculated as:
Market value of bond = 87.5% x Face value of bond
Market value of bond = 0.875 x Face value of bond
Therefore, the before tax cost of debt for the 7.2% coupon bond is:
Before tax cost of debt = Coupon rate x Market value of bond
2. Calculate the before tax cost of debt for the zero coupon bond:
The bond sells for 59% of par, so the market value of the bond can be calculated as:
Market value of bond = 59% x Par value of bond
Market value of bond = 0.59 x Par value of bond
Therefore, the before tax cost of debt for the zero coupon bond is zero since it does not have a coupon rate.
3. Now, substitute the values into the formula to calculate the aftertax cost of debt for each bond.
Aftertax cost of debt for the 7.2% coupon bond = Before tax cost of debt for the 7.2% coupon bond x (1 - Tax rate)
Aftertax cost of debt for the zero coupon bond = Before tax cost of debt for the zero coupon bond x (1 - Tax rate)
After calculating these two values, you can find the total aftertax cost of debt by summing up the aftertax cost of debt for each bond.
I hope this helps!
To find the aftertax cost of debt, you need to consider the tax savings from the interest expense. Here's how you can calculate it:
1. Calculate the interest expense for the 7.2 percent coupon bond:
Interest Expense = Face Value of the Bond * Coupon Rate
Interest Expense = X * 0.072 (since it is a semiannual bond, the coupon rate is divided by 2)
2. Calculate the tax shield:
Tax Shield = Interest Expense * Tax Rate
3. Calculate the aftertax cost of the 7.2 percent coupon bond:
Aftertax Cost of Debt = (Interest Expense - Tax Shield) / Market Value of the Bond
4. Repeat the calculation for the zero coupon bond using the book value and market value information provided.
Let's do the calculation for the 7.2 percent coupon bond:
1. Calculate the interest expense:
Interest Expense = X * 0.072
2. Calculate the tax shield:
Tax Shield = Interest Expense * 0.38 (as the tax rate is 38%)
3. Calculate the market value of the bond:
Market Value of the Bond = Face Value of the Bond * Selling Percentage
Market Value of the Bond = X * 0.875
4. Calculate the aftertax cost of the 7.2 percent coupon bond:
Aftertax Cost of Debt = (Interest Expense - Tax Shield) / Market Value of the Bond
Repeat the same steps for the zero coupon bond, using the book value and selling percentage provided.
Once you have the aftertax cost of debt for both bonds, you can average them to find the overall aftertax cost of debt for the company.