Shanken Corp. issued a 25-year, 5.5 percent semiannual bond 4 years ago. The bond currently sells for 106 percent of its face value. The book value of the debt issue is $50 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 14 years left to maturity; the book value of this issue is $45 million and the bonds sell for 50 percent of par. The company’s tax rate is 25 percent. |
a. |
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.) |
b. |
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.) |
c. |
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.) |
A)Book Value of Debt = 50 Mn + 45 Mn = 95 Mn $
B)Market Value of Debt of first debt = 50 Mn*106% = 530,00,000 $
Market Value of Second Debt = 45 Mn * 50% = 225,00,000 $
Total market value of the Debt = 53 Mn + 22.5 Mn = 755,00,000 $
C)After-Tax Cost of debt :
YTM of first Debt : Interest Amount + ((Market value - Book Value)/Numbers of years to maturity)) / ((Mareket Value+Book Value)/2)
Substituting the above value = YTM of first debt = 5.03%
YTM of zero-coupon Bond = Yield To Maturity=(Face Value/Current Bond Price)^(1/Years To Maturity)−1
Substituting the above value = YTM of first debt = 5.08%
Weighted Average YTM = 5.03%*(53 Mn/75.5 Mn) + 5.08%(22.5 Mn/75.5 Mn) = 3.53 + 1.51 = 5.04%
Best estimate of after tax cost of debt = 5.04%(1-25%) = 3.78%
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