Question

Pearce’s Cricket Farm issued a 16-year, 6% semiannual bond 2 years ago. The bond currently sells for 91% of its face value. The company’s tax rate is 38%.

Suppose the book value of the debt issue is $40 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 $30 million and the bonds sell for 50% 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 $ sign in your response.)

Total book value           $

What is the company’s total market value of debt? (Enter the answer in dollars. Omit $ 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

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ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = D A E Wrap Text Merge & Center Σ AutoSum : A Fill 2 Sort & m Find & B I U $ - % 8. Formatting as Table Styles Styles 2 Clear Filter Editing Select Font Alignment Number Cells for E Copy Paste Format Painter Clipboard CB281 BZ CA 281 282 283 CB CCCD CF CG CH CI CI FIRST BOND ISSUE 284 COUPON PRICE = 91% OF 1000 FACE VALUE YEARS PERIODS IN A YEAR YTM (SEMI ANNUAL) YTM (ANNUAL) 6.00% 910 1000 14 2 3.5100% (=RATE(CE285* CE286,-CE284*CE282/CE286,CE283,-CE284)] 7.0201% 285 286 287 288 289 290 291 292 SECOND BOND ISSUE 0.00% 500 COUPON PRICE = 50% OF 1000 FACE VALUE YEARS PERIODS IN A YEAR YTM (SEMI ANNUAL) YTM (ANNUAL) 1000 11 293 3.2008% (=RATE(CE293* CE294,-CE292*CE290/CE294,CE291,-CE292)] 6.4017% 294 295 296 297 298 299 300 TOTAL BOOK VALUE OF DEBT FIRST BOND SECOND BOND TOTAL BOOK VALUE OF DEBT DGM beta port future INDEX INTL CAP BUD IN MILLIONS IN DOLLARS 40 40000000 30000000 70 70000000 SANDRINE LEASING PV, FV, ANNUITY DIR right 30 301 K M clean KE CAPM UTILITY, SHARPE, betaCoNvexity ferences: CF670 YIELD bond portfolio BO! 120% 199 * WACC RI - I -_+ Rea ...B ENG 25-11-2019

X 2 E. Insert = Page Layout ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Formulas Data Review View - 2x % Cut Calibri Dr General B I U Wrap Text Merge & Center e 8. -11AA = = = D A E Font fic CB $ - % Number Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Formatting as Table Styles Styles Find & Select Alignment Cells CC CD CE CF CG CH CI CI TOTAL BOOK VALUE OF DEBT FIRST BOND SECOND BOND TOTAL BOOK VALUE OF DEBT E Copy Paste Format Painter Clipboard CB310 - BZ CA 297 298 299 300 301 302 303 304 305 306 307 308 309 310 311 312 313 IN MILLIONS IN DOLLARS 40000000 30000000 70000000 IN MILLIONS IN DOLLARS 40 X 91% = 36.4 36400000 30 X 50% = 15 15000000 51.4 51400000 MARKET VALUE OF FIRST BOND ISSUE MARKET VALUE OF SECOND BOND ISSUE TOTAL MARKET VALUE OF DEBT WEIGHTED AVERAGE COST OF DEBT = AFTER TAX COST OF DEBT = 6.8396% (36.4/51.4) * 7.0201% +(15/51.4)*6.4017% 4.24% [6.8396%*(1-0.38)] [MARKET VALUE BASED] 314 315 316 317 K M convexity FIRST BOND ISSUE DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean KE CAPM UTILITY, SHARPE, beta ferences: CF135 WACC RI - O -_ Rea + YIELD bond portfolio BO! 120% 9 * * 2. ENG 25-11-2019