Shanken Corp. issued a 20-year, 6 percent semiannual bond 2 years ago. The bond

ID: 2759346 • Letter: S

Question

Shanken Corp. issued a 20-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 92 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 12 years left to maturity; the book value of this issue is $40 million and the bonds sell for 52 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 and 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 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.)

Explanation / Answer

Solution.

What is the company's total book value of debt:-

Genral bond = $40 million

Zero coupon Bond = $40 million

Total = $80 million.

2. What is the company's total market value of debt.

Genral bond = $40 million x 92% = 36.80 million.

Zero coupon Bond = $40 million x 52% = $20.8 million

Total = 36.80 million + $20.8 million = $57.60 million.

3. What is your best estimate of the aftertax cost of debt

Cost of debt of genral bond = 6% x (1 - .40) = 3.60% semiannual

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Shanken Corp. issued a 20-year, 6 percent semiannual bond 2 years ago. The bond

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