Shanken Corp. issued a bond with a maturity of 20 years and a semiannual coupon

Question

Shanken Corp. issued a bond with a maturity of 20 years and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

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

What is 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).)

Shanken Corp. issued a bond with a maturity of 20 years and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 92 percent of its face value. The company’s tax rate is 35 percent.

Explanation / Answer

Face value (FV) $                                  1,000.00 Coupon rate 6.00% Number of compounding periods per year 2 Interest per period (PMT)                                            30.00 Bond price (PV) $                                   (920.00) Number of years to maturity 18 Number of compounding periods till maturity (NPER) 36 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 6.78% (Pretax cost of debt) Cost of debt 4.41% (After tax cost of debt) 6.78%*(1-35%)

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