For the firm in Problem 7, suppose the book value of the debt issue is $75 million.
Question:
For the firm in Problem 7, suppose the book value of the debt issue is $75 million. In addition, the company has a second debt issue on the market, a zero coupon bond with eight years left to maturity; the book value of this issue is $30 million, and the bonds sell for 81 percent of par. What is the company’s total book value of debt? The total market value? What is your best estimate of the after-tax cost of debt now?
Data in Problem 7
Jiminy’s Cricket Farm issued a 30-year, 4.5 percent semiannual bond three years ago. The bond currently sells for 104 percent of its face value. The company’s tax rate is 22 percent.
a. What is the pretax cost of debt?
b. What is the after-tax cost of debt?
c. Which is more relevant, the pretax or the after-tax cost of debt? Why?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan