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 5 months ago

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