Shanken Corp. issued a 30-year, 5.9 percent semiannual bond three years ago. The bond currently sells...

Shanken Corp. issued a 30-year, 5.9 percent semiannual bond
three years ago. The bond currently sells for 106 percent of its face value. The company's tax rate is 22 percent.
a. What is the pretax cost of debt?
b. What is the aftertax cost of debt?
c. Which is more relevant, the pretax or the aftertax cost of debt? Why?

Calculating Cost of Debt.
For the firm in the previous problem, suppose the book value
of the debt issue is $25 million. In addition, the company has a second debt issue on the market, a zero coupon bond with nine years left to maturity; the book value of this issue is $60 million and the bonds sell for 68 percent of par. What is the company's total book value of debt? The total market value? What is your best estimate of the aftertax cost of debt now?

Expert Solution

jeff jeffy answered 4 months ago

Shanken Corp. issued a 25-year, 5.9 percent semiannual bond 2 years ago. The bond currently sells...

Shanken Corp. issued a 25-year, 5.9 percent semiannual bond 2 years ago. The bond currently sells for 110 percent of its face value. The book value of the debt issue is $45 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 $45 million and the bonds sell for 54 percent of par. The company’s tax rate is 24 percent....

Shanken Corp. issued a 30-year, 10 percent semiannual bond 4 years ago. The bond currently sells...

Shanken Corp. issued a 30-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 $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 $50 million and the bonds sell for 54 percent of par. The company’s tax rate is 38 percent....

Shanken Corp. issued a 30 -year, 6 percent semiannual bond 4 years ago. The bond currently...

Shanken Corp. issued a 30 -year, 6 percent semiannual bond 4 years ago. The bond currently sells 95 percent of its face value. The book value of the debt issue $45 million. In addition the company has a second debt issue on the market, a zero coupon bond with 15 years left to maturity; the book value of this issue is 50 million and the bonds sell 54 percent of par. The company's tax rate is 40 percent. What is...

Shanken Corp. issued a 10-year, 6 percent semiannual bond 2 years ago. The bond currently sells...

Shanken Corp. issued a 10-year, 6 percent semiannual bond 2 years ago. The bond currently sells for 95 percent of its face value. The company's tax rate is 35 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.) Pretax cost of debt % b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as...

Shanken Corp. issued a 20-year, 4.6 percent semiannual bond 4 years ago. The bond currently sells...

Shanken Corp. issued a 20-year, 4.6 percent semiannual bond 4 years ago. The bond currently sells for 93 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 11 years left to maturity; the book value of this issue is $40 million and the bonds sell for 51 percent of par. The company’s tax rate is 21 percent....

Shanken Corp. issued a 20-year, 5.1 percent semiannual bond 2 years ago. The bond currently sells...

Shanken Corp. issued a 20-year, 5.1 percent semiannual bond 2 years ago. The bond currently sells for 97 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 15 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 25 percent....

Shanken Corp. issued a 20-year, 4.2 percent semiannual bond 3 years ago. The bond currently sells...

Shanken Corp. issued a 20-year, 4.2 percent semiannual bond 3 years ago. The bond currently sells for 89 percent of its face value. The company's tax rate is 22 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...

Shanken Corp. issued a 25-year, 4.7 percent semiannual bond 2 years ago. The bond currently sells...

Shanken Corp. issued a 25-year, 4.7 percent semiannual bond 2 years ago. The bond currently sells for 94 percent of its face value. The book value of the debt issue is $60 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 $45 million and the bonds sell for 50 percent of par. The company’s tax rate is 22 percent....

4 Shanken Corp. issued a 25-year, 5.5 percent semiannual bond 4 years ago. The bond currently...

4 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...

The XGENZ Corporation issued a 30-year, 7 percent semiannual bond 3 years ago. The bond currently...

The XGENZ Corporation issued a 30-year, 7 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 35 percent. a. What is the pretax cost of debt? b. What is the aftertax cost of debt? c. Which is more relevant, the pretax or the aftertax cost of debt? Why? d. Suppose the book value of the debt issue is $85 million. In addition, the company has a second...

Question