7) Jiminy's Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 35 percent. a. What is the pretax...

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7) Jiminy's Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 35 percent. a. What is the pretax cost of debt? b. What is the aftertax cost of debt? 8) For the firm in Problem 7, suppose 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 10 years left to maturity; the book value of this issue is $35 million, and the bonds sell for 57 percent of par. What is the company's total book value of debt? The total market value? What is your best estimate of the aftertax cost of debt now? I only need the second question

Answered Same DayDec 24, 2021

Answer To: 7) Jiminy's Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently...

Robert answered on Dec 24 2021
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7) Jiminy's Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently
sells for 93 percent of its face value. The company's tax rate is 35 percent. a. What is the pretax cost of
debt? b. What is the aftertax cost of debt?
Solution:
Coupon rate = 8%
Frequency of payments = Semiannual
Years to maturity = 30 – 3 = 27 years
No. of periods, n = 37*2 = 74
Par value (assumed) = $1000
Redemption value (assumed), R = $1000
Current price of bond, A = 1000*93% = $930
Semi-annual Coupon interest, P = 8% /2 * 1000 = $40
Let the semi-annual periodic rate be r
Current price of bond, A = P /(1+X)^1 + P /(1+X)^2 +…+ P /(1+X)^n + R /(1+X)^n...
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