Shanken Corp. issued a bond with a maturity of 16 years and a semiannual coupon

Question

Shanken Corp. issued a bond with a maturity of 16 years and a semiannual coupon rate of 6 percent 2 years ago. The bond currently sells for 91 percent of its face value. The book value of the debt issue is $40 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 11 years left to maturity; the book value of this issue is $30 million and the bonds sell for 50 percent of par. The company’s tax rate is 38 percent. What is the company’s total book value of debt?

Explanation / Answer

We have following formula to compute total book value:

Total book value = book value of bond 1 + book value of bond 2

                                = 40,000,000 +30,000,000

                                = 70,000,000

So total book value of debt would be 70,000,000.

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