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Calculating a Corporation's Cost of Debt

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Calculate the cost of debt:

Shanken Corp issued a 30 year, 7 percent semiannual bond 7 years go. The bond currently sells for 108% for its face value.

The company's tax rate is 35%.
What is the pretax cost of debt?
What is the after-tax cost of debt?
Which is more relevant the pretax or the after-tax cost of debt? Why?

Show your work.

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What is the pretax cost of debt?

The pretax cost of debt is the yield to maturity (YTM) on the debt since YTM represents the current required return of the ...

Solution Summary

This solution explains how to calculate an organization's pretax cost of debt, after-tax cost of debt, and addresses which of these costs of debt is more relevant.

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