Shanken Corp. issued a 25-year, 10 percent semiannual bond 4 years ago. The bond

Question

Shanken Corp. issued a 25-year, 10 percent semiannual bond 4 years ago. The bond currently sells for 97 percent of its face value. The book value of the debt issue is $45 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 $45 million and the bonds sell for 53 percent of par. The company's tax rate is 38 percent 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.) Total book value 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.) Total market value 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.) Cost of debt

Explanation / Answer

a) The company's total book value of Debt 10% semiannual Bond $45,000,000.00 Zero Bond $45,000,000.00 Total Book Value of Debt $90,000,000.00 b) The company's total Market value of Debt Selling at Market Value 10% semiannual Bond $45,000,000.00 97.00% $43,650,000.00 Zero Bond $45,000,000.00 53.00% $23,850,000.00 Total Market Value of Debt $67,500,000.00 c) 10% semiannual Bond Zero Bond Face Value FV $45,000,000.00 $45,000,000.00 Present Value PV $43,650,000.00 $23,850,000.00 Coupon Payment Semiannual $2,250,000.00 $0.00 Period 42 22 YTM = Rate(period, payment ,-PV,FV) 5.18% 2.93% Annual Rate = YTM x 2 10.35% 5.86% After Tax cost of debt = Annual rate x (1- 38%) 6.42% 3.63% weights of Market Value of Debts 64.67% 35.33% Total aftertax cost of debt for the company = (6.42% x 64.67%) +(3.63% x 35.33%) 5.43%

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