Completed all answers except the last one and I am stuck. Can someone please show me how to solve? I can't figure it out and I would like to have the steps so I can learn how to solve. 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
%
To find the total market value of debt, you need to add the market values of each debt issue together.
1. Calculate the market value of the 7.2 percent semiannual bond:
Market value = 87.5% * Face value
Face value = Book value = $103 million
Market value = 0.875 * $103 million
Market value = $90.125 million
2. Calculate the market value of the zero coupon bond:
Market value = 59% * Par value
Par value = Book value = $62 million
Market value = 0.59 * $62 million
Market value = $36.58 million
3. Add the market values of both bonds:
Total market value = Market value of 7.2% bond + Market value of zero coupon bond
Total market value = $90.125 million + $36.58 million
Total market value = $126.705 million
Therefore, the total market value of debt is $126,705,000.
To find the aftertax cost of the 7.2 percent coupon bond, you need to calculate the aftertax cost of debt based on the interest rate and tax rate.
4. Calculate the aftertax cost of the 7.2 percent coupon bond:
Aftertax cost of debt = Coupon rate * (1 - Tax rate)
Coupon rate = 7.2%
Tax rate = 38%
Aftertax cost of debt = 7.2% * (1 - 0.38)
Aftertax cost of debt = 7.2% * 0.62
Aftertax cost of debt = 4.464%
Therefore, the aftertax cost of the 7.2 percent coupon bond is 4.464%.
To find the aftertax cost of the zero coupon bond, you can use the same formula as step 4, as it does not have a coupon rate.
5. Calculate the aftertax cost of the zero coupon bond:
Aftertax cost of debt = 0 * (1 - Tax rate)
Tax rate = 38%
Aftertax cost of debt = 0 * 0.62
Aftertax cost of debt = 0%
Therefore, the aftertax cost of the zero coupon bond is 0%.
To find the overall aftertax cost of debt, you need to calculate the weighted average of the aftertax cost of each bond.
6. Calculate the overall aftertax cost of debt:
Total market value = Market value of 7.2% bond + Market value of zero coupon bond
Total market value = $90.125 million + $36.58 million
Total market value = $126.705 million
Aftertax cost of debt = (Market value of 7.2% bond / Total market value) * Aftertax cost of 7.2% bond + (Market value of zero coupon bond / Total market value) * Aftertax cost of zero coupon bond
Aftertax cost of debt = ($90.125 million / $126.705 million) * 4.464% + ($36.58 million / $126.705 million) * 0%
Calculate the percentages in decimal form:
Aftertax cost of debt = (0.710829) * 0.04464 + (0.289171) * 0.00
Aftertax cost of debt = 0.031749 + 0
Aftertax cost of debt = 0.031749
Convert to percentage:
Aftertax cost of debt = 3.175%
Therefore, the aftertax cost of debt is 3.175%.
To find the total market value of debt, you have to calculate the market values of both the 7.2% semiannual bond and the zero coupon bond.
1. To find the market value of the 7.2% semiannual bond, multiply the face value of the bond by its market price. Since the bond sells for 87.5% of its face value, the market value of the bond is 87.5% of its face value. Therefore, the market value of the 7.2% bond is (87.5%)(Face Value) = (87.5%)($103,000,000).
2. To find the market value of the zero coupon bond, multiply the par value of the bond by its market price. Since the bond sells for 59% of its par value, the market value of the bond is 59% of its par value. Therefore, the market value of the zero coupon bond is (59%)(Par Value) = (59%)($62,000,000).
3. Add the market values of both bonds to find the total market value of debt. The total market value of debt is the sum of the market values of the two bonds calculated above.
Now that you know the steps, you can calculate the total market value of debt by plugging in the values from the problem.