Shanken Corp. issued a 25-year, 4.3 percent semiannual bond 4 years ago. The bond currently sells for 90 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 52 percent of par. The company’s tax rate is 23 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 million + 45 Million = 95
b. Market Value of Debt = 90%*50+52%*45 = 68.4
c. YTM of first bond is calculated as follows
Let's assume par value of single bond = 1000
Coupon= 4.3%*1000/2 = 21.50
Price = 90%*1000 = 900
Number of Periods = 25*2 = 50
YTM using excel formula =2*RATE(50,21.50,-900,1000) = 5%
Price of second bond = 52%*1000 = 520
Number of periods = 14
YTM of second bond = (1000/520)^1/14-1 = 4.78%
Cost of debt = Cost of Debt * Weight of market value of debt + Cost
of zero coupon debt* Weight of market value of zero coupon =
5%*45/68.4+4.78%*23.4/68.4 = 4.93%
After tax cost of Debt = 4.93%*(1-Tax rate) = 4.93%*(1-23%) =
3.79%
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