Question

Shanken Corp. issued a bond with a maturity of 30 years and a semiannual coupon rate of 6 percent 4 years ago. The bond currently sells for 95 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 15 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 40 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).)

Answer 1

Answer:

The company’s total book value of debt is $95,000,000.

Explanation:

1st Issue of Bonds:  

Face Value = $45,000,000

Market Value = 95%*$45,000,000

                       = $42,750,000

Annual Coupon Rate = 6%

Semiannual Coupon Rate = 3%

Semiannual Coupon = 3%*$45,000,000

                                  = $1,350,000

Time to Maturity = 26 years

Semiannual Period to Maturity = 52

Let semiannual YTM be i%  

$42,750,000 = $1,350,000*PVIFA(i%, 52) + $45,000,000*PVIF(i%, 52)

Using financial calculator:

N = 52

PV = -42750000

PMT = 1350000

FV = 45000000

2nd Issue of Bonds:

Face Value = $50,000,000

Market Value = 54%*$50,000,000

                       = $27,000,000

Time to Maturity = 15 years

Semiannual Period to Maturity = 30

Let semiannual YTM be i%

$27,000,000 = $50,000,000*PVIF(i%, 30)

Using financial calculator:

N = 30

PV = -27000000

PMT = 0

FV = 50000000

Total Book Value of Debt = $45,000,000 + $50,000,000

                                           = $95,000,000

Therefore, The company’s total book value of debt is $95,000,000.