ylab & Shanken Corp, issued a 25 year, 8 percent semiannual bond 3 years ago. Th
ID: 2783612 • Letter: Y
Question
ylab & Shanken Corp, issued a 25 year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 face value. The book value of issue is $45 million. In addition, the company has a t of its 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. The company's tax rate is 35 percent 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 and 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 and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of debt eBook & R
Explanation / Answer
Book Value of Debt=45Million+45 Million=90 Million Market Value of Debt=45 Million*93%+45 Million*53%=65.7 Million Pretax cost of Debt of Zero Coupon Bond 530= $1,000(PVIF, R%,26) By Solving this R=2.47% YTM=2.47*2=4.94% 4.94% Post Tax cost of Debt of Zero Coupon Bond=4.94%*(1-.35) 3.21% Pretax cost of Debt of 8% semi Annual Bond Half Yearly Interest 1000*8%/2 40 $40 get after every six month on Maturity , he will get $1,000 PV of both the inflows are 930 So now the equation is 930= $40(PVIF, R%,44)+ $1000(PVIF, R%,44) By Solving this R=4.36% YTM=4.36*2=8.72% 8.72% Post Tax cost of Debt of 8% semi annual bondBond=8.72%*(1-.35) 5.67% The aftertax cost of debt for the company is the weighted average of the aftertax cost of debt for all outstanding bond issues. We need to use the market value weights of the bonds. The total aftertax cost of debt for the company is: 5.67%*41.85 Million/65.7 Million+3.21%*23.85 Million/65.7 million 4.78%
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