Question

Shanken Corp. issued a 10-year, 10 percent semiannual bond 4 years ago. The bond currently sells for 94 percent of its face value. The book value of the debt issue is $55 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 $30 million and the bonds sell for 55 percent of par. The company’s tax rate is 38 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.)

Total book value

$ 85000000

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.)

Total market value

$   68200000

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.)

Cost of debt

% ???????????

Answer 1

a) Total Book Value of Debt = 55 + 30 = 85 million or 85,000,000

b) Market Value of Debt = 55*94%+ 30*55% = 68.20 or 6,200,000

c) Number of Periods of Bond 1 = 2* 6 = 12
Rate semiannually = 10%/2 =5%
Coupon = Book value * Coupon/2 = 55*10%/2 = 2.75
Price = 55*94% = 51.70
Rate using excel formula =2*RATE(12,2.75,-51.70,55) = 11.40%

For Zero coupon Bond
Par value = 30
Price of bond =55%*30 = 16.50
Rate = (30/16.50)^1/14-1 = 4.36%
Cost of debt = 11.40%*( 51.70/ 68.20) + 4.6328%*(16.50/68.20) = 9.76%


After tax cost of debt = 9.76%*(1-tax rate) = 9.76%*(1-38%) = 6.05%


Please Discuss in case of Doubt

Best of Luck. God Bless
Please Rate Well