Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bon
ID: 2499008 • Letter: S
Question
Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent.
The book value of the debt issue is $70 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is $100 million and the bonds sell for 61 percent of par.
What is the company's total book value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the company's total market value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is your best estimate of the aftertax cost of debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent.
The book value of the debt issue is $70 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to maturity; the book value of this issue is $100 million and the bonds sell for 61 percent of par.
Explanation / Answer
a)Total book value= $70mn+$100mn=$170 mn
b) Market value = Price of bond* no of bonds
Price of first bond=108%1000=$1080
No of bonds=70mn/1000=70000
Total value=1080*70000= $75,600,000
Zero coupon bond = 61% of par= 0.61*$100mn= $61 mn
Total Market value=$75.6+$61= $136.6mn
Cost of debt:
23 years left and coupon rate=6.2% semiannual
If we take face value as 1000 the coupon payment=6.2%/2*1000=$31 (semiannual)
1080 = (31/r) ( 1- (1+r)^(-46) ) + [ 1000/ (1+r)^46 ]
solving for r we get 2.79% it is semi anuual and yearly it is 5.58%
After tax cost of debt= 5.58*(1-tax rate)
=5.58%*(1-0.35)=3.63%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.