Question

3

Shanken Corp. issued a 15-year, 4.9 percent semiannual bond 4 years ago. The bond currently sells for 96 percent of its face value. The company's tax rate is 24 percent.

a.	What is the pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is 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.)

   

c.	Which is more relevant, the pretax or the aftertax cost of debt?

   

• Aftertax cost of debt

• Pretax cost of debt

Answer 1

a

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

960 =∑ [(4.9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^11x2

k=1

YTM% = 5.39

b

After tax rate = YTM * (1-Tax rate)

After tax rate = 5.39 * (1-0.24)

After tax rate = 4.1

c

After tax cost of debt