Jiminy’s Cricket Farm issued a bond with 30 years to maturity and a semiannual coupon

a. What is the company’s total book value of debt?

total book value of debt = $60,000,000 + $35,000,000 = $95,000,000

b. What is the company’s total market value of debt?

total market value of debt = ($60,000,000 x 1.07) + ($35,000,000 x 0.76) = $64,200,000 + $26,600,000 = $90,800,000

c. What is your best estimate of the after tax cost of debt?

weight of debt (using market value):

$64,200,000 / $90,800,000 = 70.7%

$26,600,000 / $90,800,000 = 29.3%

YTM bond I = {1,200,000 + [(60,000,000 - 64,200,000)/56]} / [(60,000,000 + 64,200,000)/2] = 1,125,000 / 62,100,000 = 1.8115 x 2 = 3.62%

YTM bond II = (35 / 26.6)¹/¹⁰ - 1 = 2.78%

after tax cost of debt = (0.707 x 3.62% x 0.79) + (0.293 x 2.78% x 0.79) = 2.02% + 0.64% = 2.66%