Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bon

Question

Shanken Corp. issued a 30-year, 6.2 percent semiannual

bond 7 years ago. The bond currently sells for 108 percent of its face value. The company's tax rate is 35 percent.

For the firm in the previous problem, suppose the book value of the debt issue is $70 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 $100 million and the bonds sell for 61 percent of par.

What is your best estimate of the after tax cost of debt now? (Please show what is need in the excel) Thanks

Explanation / Answer

Market Value of Coupon Bond = 70*108% = $ 75.60 Million

Market Value of Zero Coupon Bond = 100*61% = $ 61 Million

Total market value = $ 136.60 Million

Before tax Cost of Coupon Bond = rate(nper,pmt,pv,fv)*2

nper = (30-7)*2 = 46

pmt = 6.2%*1000*1/2 = 31

pv = 108%*1000 = 1080

fv = 1000

Before tax Cost of Coupon Bond = rate(46,31,-1080,1000)*2

Before tax Cost of Coupon Bond = 5.58%

Before tax Cost of Zero Coupon Bond = rate(nper,pmt,pv,fv)*2

nper = 12*2 = 24

pmt = 0

pv = 61%*1000 = 610

fv = 1000

Before tax Cost of Zero Coupon Bond = rate(24,0,-610,1000)*2

Before tax Cost of Zero Coupon Bond = 4.16%

After tax cost of debt = Before tax Cost of Coupon Bond *(1-tax rate) * weight of Coupon Bond +  Before tax Cost of Zero Coupon Bond *(1-tax rate) * weight of Zero Coupon Bond

After tax cost of debt = 5.58*(1-35%)*75.60/136.60 +  4.16*(1-35%)*61/136.60

After tax cost of debt = 3.21%

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