Peyton’s Colt 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 company’s tax rate is 38 percent. The book value of the 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 59.0 percent of par.
What is the total book value of debt?
What is the total market value of debt?
To find the total book value of debt, we add the book values of both bond issues.
The book value of the first bond issue is given as $103 million.
The book value of the second bond issue is given as $62 million.
Therefore, the total book value of debt is $103 million + $62 million = $165 million.
To find the total market value of debt, we need to calculate the market value of each bond issue separately and then add them together.
For the first bond issue, which has 24 years remaining on its 30-year term, we need to calculate the present value of its future cash flows.
The bond has a 7.2 percent semiannual coupon rate, so it pays 7.2 / 2 = 3.6 percent coupon twice a year.
The bond currently sells for 87.5 percent of its face value or par value, so we can calculate the market value as 87.5 percent / 100 percent * $103 million = $90.13 million.
For the second bond issue, a zero-coupon bond with 9 years remaining to maturity, we can calculate its market value directly as 59.0 percent / 100 percent * par value of $62 million = $36.58 million.
Finally, we add the market values of both bond issues:
$90.13 million + $36.58 million = $126.71 million.
Therefore, the total market value of debt is $126.71 million.