Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue

Question

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 92 percent of face value. The issue makes semiannual payments and has an embedded cost of 12 percent annually.

If the tax rate is 33 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.)

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 92 percent of face value. The issue makes semiannual payments and has an embedded cost of 12 percent annually.

Explanation / Answer

a) Pretax cost of debt

Using the formula of Rate in excel

= RATE (NPER,PMT,-PV,FV)

=RATE(12*2,1000*12%/2,-920,1000)*2

= 13.36%

b) After tax cost of debt = Pretax cost of debt * (1-tax rate)

= 13.36%*(1-.33)

= 8.95%

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