Question

g Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent. (Assume that the face value of one coupon bond is $1,000.) 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?

Answer 1

Answer and Explanation:

The computation is shown below:

a. Pre tax cost of debt is

Given that

NPER = 30 - 7 = 23 × 2= 46

PMT =$1,000 × 6.2% ÷ 2 = $31

FV = $1,000

PV = $1000 × 108% = $1,080

The formula is shown below:

= RATE(NPER,PMT,-PV,FV,TYPE) × 2

AFter applying the above formula, the rate is 5.58%

b. The after tax cost of debt is

= 5.58% × (1 - 0.35)

= 3.63%

c. The after tax cost of debt would be considered more relevant