Question

Shanken Corp. issued a 15-year, 5.3 percent semiannual bond 2 years ago. The bond currently sells for 105 percent of its face value. The company's tax rate is 23 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 decimal places, e.g., 32.16.)

Answer 1

Calculate the pretax cost of debt as follows:

Semiannual rate is 2.389588%.

Annual rate is 2.389588%*2 = 4.78%.

Pretax cost of debt is 4.78%.

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After tax cost of debt = Pre tax cost of debt *(1- Tax rate)

After tax cost of debt = 4.78% * (1-23%)

After tax cost of debt = 3.68%.