iminy's Cricket Farm issued a 30-year, 6 percent semi-annual bond 5 years ago. The bond currently sells for 86 percent of its face value. The book value of the debt issue is $23 million. The company's tax rate is 33 percent, and the bond has a YTM of 7.21%.

In addition, the company has a second debt issue on the market, a zero coupon bond with 5 years left to maturity; the book value of this issue is $83 million and the bonds sell for 76 percent of par.

Required:

(a) What is the company's total book value of debt?

Note: Book value represents the original value of the debt. For coupon bonds, the par value is the book value (coupon bonds are always originally sold at par). For zero-coupon bonds, the book value will be what the bonds are originally sold for. These bonds always trade for less than par value. In fact, their price is always just the present value of the par payment. In this problem, you are given both book values, so add them together.

(b)What is the company's total market value of debt? (Do not round your intermediate calculations.)

Note: Market value is what the bonds are worth today. This market price is often quoted as a percentage of the par value.

c) What is your best estimate of the aftertax cost of debt?(Do not round your intermediate calculations.)

Note: This is going to be a yield, not a dollar amount. It is the weighted average YTM adjusted for taxes. You can get the YTM for the zero coupon bond using the present value equation for a single cash flow: PV = FV(1+r)-T. Since the YTM for the coupon bond is an APR, you should calculate the YTM for the zero as an APR with semi-annual compounding so both bond yields are on the same compounding frequency:

zero-coupon price = CF(1+YTM/2)-2T.

Now adjust for taxes and take the market value-weighted average."

In addition, the company has a second debt issue on the market, a zero coupon bond with 5 years left to maturity; the book value of this issue is $83 million and the bonds sell for 76 percent of par.

Required:

(a) What is the company's total book value of debt?

Note: Book value represents the original value of the debt. For coupon bonds, the par value is the book value (coupon bonds are always originally sold at par). For zero-coupon bonds, the book value will be what the bonds are originally sold for. These bonds always trade for less than par value. In fact, their price is always just the present value of the par payment. In this problem, you are given both book values, so add them together.

(b)What is the company's total market value of debt? (Do not round your intermediate calculations.)

Note: Market value is what the bonds are worth today. This market price is often quoted as a percentage of the par value.

c) What is your best estimate of the aftertax cost of debt?(Do not round your intermediate calculations.)

Note: This is going to be a yield, not a dollar amount. It is the weighted average YTM adjusted for taxes. You can get the YTM for the zero coupon bond using the present value equation for a single cash flow: PV = FV(1+r)-T. Since the YTM for the coupon bond is an APR, you should calculate the YTM for the zero as an APR with semi-annual compounding so both bond yields are on the same compounding frequency:

zero-coupon price = CF(1+YTM/2)-2T.

Now adjust for taxes and take the market value-weighted average."