Question

Jiminy's Cricket Farm issued a 15-year, 5.7 percent semiannual bond 3 years ago. The bond currently sells for 108 percent of its face value. 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 $30 million, and the bonds sell for 52 percent of par. The company’s tax rate is 22 percent.

a.What is the company's total book value of debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
b.What is the company's total market value of debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
c.What is your best estimate of the aftertax cost of debt?

Answer 1

Ford Motor Company is paying an interest rate of 3% on their borrowed funds. If the market interest rate rises from 3% to 4% a year after issuing the bonds, the value of the bond will decrease.

Step-by-step explanation:

a. The interest rate that Ford Motor Company is paying on the borrowed funds can be calculated using the formula: Interest Rate = Annual Coupon Payment / Face Value of the Bond. In this case, the interest rate is $150 / $5,000 = 0.03 or 3%.

b. When the market interest rate rises from 3% to 4% a year after Ford issues the bonds, the value of the bond will decrease. This is because the bond's fixed interest rate of 3% is lower than the market rate of 4%, making it less attractive to investors.