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.
Add the tax to the "before tax" to get the answer
Anonymous, I still don't understand.
To calculate the overall aftertax cost of debt, you need to consider the weightage of each debt issue. Here are the steps to calculate:
1. Calculate the market value of each debt issue:
- For the 7.2% semiannual bond: 87.5% * $103,000,000 = $90,125,000
- For the zero coupon bond: 59% * $62,000,000 = $36,580,000
2. Calculate the total market value of debt:
Total market value = $90,125,000 + $36,580,000 = $126,705,000
3. Calculate the weightage of each debt issue:
- For the 7.2% semiannual bond: $90,125,000 / $126,705,000 ≈ 0.71
- For the zero coupon bond: $36,580,000 / $126,705,000 ≈ 0.29
4. Calculate the aftertax cost of debt for each issue:
- For the 7.2% semiannual bond:
Aftertax cost of debt = (1 - Tax rate) * Coupon rate = (1 - 0.38) * 7.2% ≈ 4.464%
- For the zero coupon bond:
Since zero coupon bonds have no coupon payments, the aftertax cost is simply the YTM (yield to maturity).
5. Calculate the overall aftertax cost of debt:
Aftertax cost of debt = (Weightage of 7.2% bond * Aftertax cost of 7.2% bond) + (Weightage of zero coupon bond * Aftertax cost of zero coupon bond)
Aftertax cost of debt = (0.71 * 4.464%) + (0.29 * YTM of zero coupon bond)
You need the yield to maturity (YTM) of the zero coupon bond to calculate the final aftertax cost of debt. If the YTM is not provided, you won't be able to calculate the exact overall aftertax cost of debt.
To calculate the aftertax cost of debt, you need to consider the coupon rate, the tax rate, and the market value of the debt.
For the 7.2 percent semiannual bond:
1. Start by finding the before-tax cost of debt. Since it is a semiannual bond, divide the coupon rate by 2: 7.2% / 2 = 3.6%.
2. Convert the coupon rate to a decimal: 3.6% / 100 = 0.036.
3. Multiply the decimal coupon rate by the market value of the bond to get the before-tax interest payment: 0.036 * 87.5% of face value.
4. Multiply the before-tax interest payment by (1 - tax rate) to calculate the aftertax interest payment: before-tax interest payment * (1 - 0.38) = aftertax interest payment.
5. Divide the aftertax interest payment by the market value of the bond to get the aftertax cost of debt: (aftertax interest payment / market value) * 100.
For the zero coupon bond:
1. Calculate the difference between the market value and par value: 59% of par - par.
2. Multiply the difference by (1 - tax rate) to get the aftertax interest payment.
3. Divide the aftertax interest payment by the market value of the bond to calculate the aftertax cost of debt: (aftertax interest payment / market value) * 100.
Now, you can calculate the aftertax cost of debt by applying the above steps for each type of bond, and then taking the weighted average of the aftertax costs of debt using the book values of the debt issues.