Shanken Corp. issued a 25-year, 8 percent semiannual bond 3 years ago. The bond

Question

Shanken Corp. issued a 25-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 35 percent. 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 13 years left to maturity; the book value of this issue is $45 million and the bonds sell for 53 percent of par.

What is the company's total book value of debt?

What is the company's total market value of debt?

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))

What is the company's total market value of debt?

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))

Explanation / Answer

1. Company's Total book value of debt = $45 million + $45 million

                                                                      = $ 90 million

2. Company's total market value of debt = ($45 million * 93%) + ($45 million * 53% )

                                                                         =$65.70 million

3. After tax cost of debt = cost of Debt * (1-Tax rate )

                                            =8% * (1 - 35% )

                                            =5.2%

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