Shanken Corp. issued a bond with a maturity of 30 years and a semiannual coupon

Question

Shanken Corp. issued a bond with a maturity of 30 years and a semiannual coupon rate of 6 percent 4 years ago. The bond currently sells for 95 percent of its face value. 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 15 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? (Do not round intermediate calculations. Enter your 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. 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. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Shanken Corp. issued a bond with a maturity of 30 years and a semiannual coupon rate of 6 percent 4 years ago. The bond currently sells for 95 percent of its face value. 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 15 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.

Explanation / Answer

Book value of the debt is: 45 +50 = $95 Million =$95,000,000

Market Value of the debt = 0.95*45 + 0.54*50 = 69.75 Milliom = $69,750,000

Cost of debt of bond issue

Yield is calcualated using excel = rate(nper,pmt,pv,fv) nper= number of years to maturity = 26, pmt =60 , fv=1000, pv=950

yield= Cost of debt= rate(26,60,-950,1000) = 6.4%

Cost of Zero coupon bonds

Yield = cost of zero coupon bonds =( Fv/price)^(1/number of years)-1 = (1000/540)^(1/15)-1 = 4.19%

Hence Total cost of debt as per thier wieghts will be

(45/95)*6.40 + (50/95)*4.19 = 5.24%

Hence with tax rate the cost of debt = 5.24*(1-0.40)= 3.142%

Hence COst of debt = 3.14%

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