Shanken Corp. issued a bond with a maturity of 30 years and a semiannual coupon
ID: 2775901 • Letter: S
Question
Shanken Corp. issued a bond with a maturity of 30 years and a semiannual coupon rate of 6 percent 3 years ago. The bond currently sells for 92 percent of its face value. The book value of the debt issue is $50 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 $50 million and the bonds sell for 54 percent of par. The company’s tax rate is 40 percent.
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?
Explanation / Answer
a)Book value of debt= 50 +50 = $ 100 million
b)Market value of first bond = 50 * .92 = $ 46 million
market value of second bond = 50 *.54 = $ 27 million
Total market value = 46 +27
= 73 million
c)1 bond : YTM =[Interest + (face value - price)/years remaining ] /[(face value + price)/2]
Lets face value be 1000 ,price = 1000*.92 = 920
semiannual interest = 1000 * .06 * 6/12 = 30
semiannual months =(30-3) = 27 *2 = 54
YTM= [30+ (1000- 920)/54] /[(1000+920)/2]
= [30 + (80/54) ] / [1920 /2]
= [30 + 1.48 ] / 960
=31.48 /960
= .0328 or 3.28% semiannually or6.56 % annually
After tax debt = 6.56 (1-.40 ) = 3.936%
bond 2 :Yield = (50/27)^1/12 - 1
= (1.85185 ) ^ .08333 - 1
= 1.052687 - 1
= .0527 or 5.27%
After tax yield = 5.27 (1- .40) = 3.162 %
Best estimate of after tax cost of debt = 3.936 * (46/73 ) + 3.162 * (27 / 73)
= 3.936 * .63 + 3.162 * .37
= 2.48 + 1.17
= 3.65%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.