Answer:
Explanation:
a.)
The total debt amount in Jiminy's Cricket Farm's balance sheet on the liabilities side is referred to as the book value of debt. It is calculated by be the summing up of the individual book values of the two bonds that this company has.
<u>Total book value ;</u>
Book value of 30 year bond = $60,000,000
Book value of the Zero-coupon bond = $35,000,000
Total book value of debt = $60 + $35 = $95,000,000
b.)
The sum of market values of the two bonds this company makes up the total market value of debt. It is calculated by multiplying the current price of the bond by the number of outstanding bonds.
Formula for market value = Price * number of bonds
<u>30 year bond;</u>
Number: 60,000,000/1000 = 60,000 bonds
Market value = 1.10 * 1000 *60,000 = $66,000,000
<u>Zero-coupon bond;</u>
Number: 35,000,000/1000 = 35,000 bonds
Market value = 0.67 * 1000 *35,000 = $23,450,000
Total market value of debt = $66,000,000 + $23,450,000 = $89,450,000
c.) Companies who have debt in their capital structure benefit from tax shield on their debt interest rates . Jiminy’s Cricket Farm has two bonds, find the average of the two rates to get after tax cost of debt.
Calculate the Pretax cost of debt first. Using a financial calculator, input the following;
<u>30 year bond;</u>
N = 30*2 = 60
PV = -$66,000,000
PMT = (6%/2)* $60,000,000 = $1,800,000
FV = $60,000,000
then compute semiannual rate; CPT I/Y = 2.664%
Convert to annual rate = 5.329% (this is the pretax cost of debt)
<u>Zero-coupon bond;</u>
N = 8
PV = -$23,450,000
PMT = 0
FV = $35,000,000
then CPT I/Y = 5.133% (this is the pretax cost of debt)
Next, find the average pretax cost of debt = (5.329% + 5.133%) /2 = 5.231%
After tax cost of debt = pretax cost of debt (1-tax)
After tax cost of debt = 5.231% (1-0.23) = 4.03%
