Question

Shanken Corp. issued a 20-year, 5.8 percent semiannual bond 4 years ago. The bond currently sells for 109 percent of its face value. The book value of the debt issue is $40 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 11 years left to maturity; the book value of this issue is $40 million and the bonds sell for 53 percent of par. The company’s tax rate is 23 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? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

    

Answer 1

Book value of 1st issue = Book value of 2nd issue = Total book value = $40,000,000 $40,000,000 $80,000,000 market value of 1st issue = market value of 2nd issue = Total market value = $43,600,000 $21,200,000 $64,800,000 a) Before tax cost of debt: particualrs amount weight cost weighted cost One $43,600,000 0.67284 4.98% 3.35% RATE(16*2,1000*0.058/2,- 1090, 1000)*2 Second $21,200,000 0.32716 1.92% 5.86% RATE(11*2,0,-530,1000)*2 $64,800,000 5.26% Before tax cost of debt b) after tax cost of debt: Before tax cost of debt * (1-Tax) = 4.05% 5.26%*(1-23%)