Shanken Corp. issued a 30-year, 9 percent semiannual bond 3 years ago. The bond

Question

Shanken Corp. issued a 30-year, 9 percent semiannual bond 3 years ago. The bond currently sells for 106 percent of its face value. The company%u2019s tax rate is 34 percent. The book value of the debt issue is $24 million. In addition, the company has a second debt issue on the market, a zero coupon bond with three years left to maturity; the book value of this issue is $76 million and the bonds sell for 78 percent of par.

1) What is the company%u2019s total book value of debt?

2) Calculate the total market value.

3) What is your best estimate of the aftertax cost of debt?

Explanation / Answer

1) What is the company%u2019s total book value of debt?

= 24+ 76 = $100 Million

2) Calculate the total market value.

= 25.44 + 59.28 = $84.72 Million

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