Shanken Corp. issued a bond with a maturity of 15 years and a semiannual coupon

Question

Shanken Corp. issued a bond with a maturity of 15 years and a semiannual coupon rate of 8 percent 3 years ago. The bond currently sells for 96 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 $35 million and the bonds sell for 51 percent of par. The company’s tax rate is 35 percent.

What is the company’s total book value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 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 (e.g., 1,234,567).)

What is your best estimate of the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Company's total book value of debt = Book value of 1st Bond Issue + Book value of 2nd Bond issue Company's total book value of debt = $60 million + $35 million = $95 million Company’s total market value of debt = Market value of 1st Bond Issue + Market value of 2nd Bond issue Company’s total market value of debt = ($60 million * 96%) + ($35 million * 51%) Company’s total market value of debt = $57.60 million + $17.85 million = $75.45 million Best estimate of the aftertax cost of debt = post tax cost of 1st Bond Issue + post tax cost of 2nd Bond issue Best estimate of the aftertax cost of debt = (8% * 2 * 0.65) + 0 = 0.104 i.e.10.40% per annum

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