Question

Shanken Corp. issued a bond with a maturity of 15 years and a semiannual coupon rate of 10 percent 4 years ago. The bond currently sells for 91 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 11 years left to maturity; the book value of this issue is $35 million and the bonds sell for 51 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. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

Total book value $ =

What is the company’s total market value of debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) T

otal market value $ =

What is your best estimate of the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Cost of debt %=

Answer 1

Company’s total book value of debt= $60 + $35= $95 million

Market value of company's debt= 0.91*60 + 0.51*35 = 54.60 + 17.85 = $ 72.45 million

Yield to maturity for debt issue of $60 million can be calculated in excel as follows:

Yield to maturity for debt issue of $35 million can be calculated in excel as follows:

So, the after tax cost of debt of the firm using market values of the debts as weights= (1-0.38)*((54.6/72.45)*11.46 + (17.85/72.45)*6.31)

=0.62*(8.64 + 1.55) = 6.32%