Question

Pearce’s Cricket Farm issued a 25-year, 8% semiannual bond 3 years ago. The bond currently sells for 93% of its face value. The company’s tax rate is 35%.

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 13 years left to maturity; the book value of this issue is $45 million and the bonds sell for 53% of par. Assume the par value of the bond is $1,000.

What is your best estimate of the after-tax cost of debt? Enter your answer as a percentage rounded to 2 decimal places.

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC EWrap Text Calibri 11 General ECopy Fill Merge & Center Insert Delete Format Paste +.0 .00 Conditional Format Cell Sort & Find & BIU % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells fox CB279 СВ CF CH BZ CA CC CD CE CG CI CJ 277 278 279 280 281 8.00% 282 FIRST BOND ISSUE COUPON PRICE = 93% OF 1000 283 930 284 FACE VALUE 1000 285 YEARS 22 286 PERIODS IN A YEAR 2 4.3603% RATE(CE285* CE286,-CE284* CE282/CE286,CE283,-CE284)] YTM (SEMI ANNUAL) 287 YTM (ANNUAL) 8.7206% 288 289 0.00% 290 SECOND BOND ISSUE COUPON PRICE = 53% OF 1000 291 530 292 FACE VALUE 1000 293 YEARS 13 294 PERIODS IN A YEAR 2 YTM (SEMI ANNUAL) YTM (ANNUAL) 2.4719% =RATE(CE293* CE294,-CE292* CE290/CE294,CE291,-CE292)] 295 4.9438% 296 297 LEASING PV, FV, ANNUITY YIELD bond portfolio RI clean cONvexity DGM beta DIR right КЕ САРМ UTILITY, SHARPE, beta port future INDEX INTL CAP BUD SANDRINE WACC Rea II erences: CF670 120% WA 06:54 ENG 25-11-2019

ke - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill в IU- Merge & Center Insert Delete Format Paste +.0 .00 Conditional Format Cell Sort & Find & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells fx СЕЗ10 СВ СС CF CH BZ CA CD CE CG CI CJ 296 YTM (ANNUAL) 4.9438% 297 298 299 300 301 302 IN MILLIONS 45 X 93%= 41.85 303 MARKET VALUE OF FIRST BOND ISSUE 45 X 53% = 304 MARKET VALUE OF SECOND BOND ISSUE 23.85 65.7 305 TOTAL MARKET VALUE OF DEBT 306 7.3496% (41.85/65.7) * 8.7206% + (23.85/65.7)*4.9438% 307 WEIGHTED AVERAGE COST OF DEBT answer 4.78% [7.6184%*(1-0.35)] [MARKET VALUE BASED] 308 AFTER TAX COST OF DEBT = 309 310 311 312 313 314 315 316 LEASING PV, FV, ANNUITY YIELD bond portfolio RI cONvexity DGM beta clean КЕ САРМ UTILITY, SHARPE, beta port future INDEX DIR right INTL CAP BUD SANDRINE WACC II Rea erences: CF135 120% XУ WA 06:56 ENG 25-11-2019