Question

Suspect Corp, issued a bond with a maturity of 25 years and a semiannual coupon rate of 10 percent 4 years ago. The bond currently sells for 97 percent of its face value. 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 11 years left to maturity, the book value of this issue is $45 million and the bonds sell for 53 percent of par. The company's tax rate is 38 percent. 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 $ 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 rounded to 2 decimal places, e.g., 32.16.) calculations. Enter your answer as a percent Cost of debt

Answer 1

1]	Total book value of debt = 45000000+45000000 =	$ 9,00,00,000
2]	Market value of first debt = 45000000*97% =	$ 4,36,50,000
	Market value of second = 45000000*53% =	$ 2,38,50,000
	Total market value of debt	$ 6,75,00,000
3]	Before tax cost of debt = YTM.
	Using a calculator:
	YTM of 1st debt =	10.35%
	[Inputs: Face value = 45m, Price = 43.65m,
	years to maturity = 21, Payment interval = 2]
	YTM of 2nd debt [Zero coupon bond] = (45/23.85)^(1/11)-1 =	5.94%
	Weighted average YTM = 10.35%*43.65/67.50+5.94%*23.85/67.50 =	8.79%
	Best estimate of after tax cost of debt = 8.79*(1-38%) =	5.45%