Shanken Corp. issued a 10-year, 8 percent semiannual bond 3 years ago

Shanken Corp. issued a 10-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 96 percent of its face value. The company’s tax rate is 35 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.)

Pretax cost of debt %

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.)

Aftertax cost of debt %

c. Which is more relevant, the pretax or the aftertax cost of debt?

Aftertax cost of debtPretax cost of debt

Here’s the SOLUTION

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