Question

& 12 - Cost of Capital - Ch.14 Saved Pearce's Cricket Farm issued a 30-year, 6% semiannual bond 4 years ago. The bond currently sells for 95% of its face value. The company's tax rate is 40%. Suppose the book value of the debt issue is $45 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 $50 million and the bonds sell for 54% of par. Assume the par value of the bond is $1,000. What is the company's total book value of debt? (Enter the answer in dollars. Omit S sign in your response.) Total book value What is the company's total market value of debt? (Enter the answer in dollars. Omit S sign in your response.) Total market value $ What is your best estimate of the after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Cost of debt %

Answer 1

solution : Total book value of debt = 45 mil + 50mil - $95 million Total market value of debt = (45 mx 954) +60 x 546) = 42,750,000 +27,000,000 -$ 69,750,000 Best estimate of Aftor tan cost of debt Debt-l Nper - 26X2 -52 (30-4 =264) PMT = 1000 x 64 =$30 PV =-950 fr. 1000 Rate [52, 30, -950, 1000] x2 = 6.409% Rate = 6.40 (1 - 40%) Aftor Tan= cost of debt 1 = 3.84%

Second debtis Npor = 15x2 = 30 PMT=0 Pr=-540 fre 1000 Rate = Rak (30,0, -540,1000] *2 = 4:15% Aftor Tan = 4:15 (1-404.) Cost of debt 2 = 12.49% weight of debt 1 42,750,000 69,750,000 0.61 - weight of debt 2 27,000,000 69,750,000 0.39 Aftor Tax Cost of debt = Weight of debt x weight of de 62 + x costof debt I cost of debt 2 061X 3.84% + 0-39 x 2.49% 3.31%