Problem:
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.
Required:
Question 1: What is the pretax cost of debt?
Question 2: What is the aftertax cost of debt? Which is more relevant and why?
Note: Provide support for your underlying principle.