Question

Checkor Suspect Corp. issued a bond with a maturity of 15 years and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 95 percent of its face value. The book value of the debt issue is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 15 years left to maturity, the book value of this issue is $35 million and the bonds sell for 51 percent of par. The company's tax rate is 40 percent 6.66 points What is the company's total book value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Total book value $ References What is the company's 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 $ What is your best estimate of the aftertax cost of debt? (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of debt

Answer 1

a) Total book value of debt = $95,000,000 [ 60000000+35000000 ] b) Total market value = $74,850,000 ((60*0.95)+(35*0.51))*1000000 after-tax cost of coupon = 3.95% RATE(13*2,60/2,-950, 1000)*2*0.6 after-tax cost of zero = 2.72% ((1000/510)^(1/30)-1)*2*0.6 particulars Coupon bond Zero bond $57 Market value weights cost of debt 0.7615 3.947% $18 0.2385 2.72% $75 6.67% Total value After tax cost of debt now: 16.67%