ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i

Question

ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with nine years to maturity that is quoted at 115 percent of face value. The issue makes semiannual payments and has an embedded cost of 10.2 percent annually.

What is ICU

ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with nine years to maturity that is quoted at 115 percent of face value. The issue makes semiannual payments and has an embedded cost of 10.2 percent annually.

Explanation / Answer

coupon payment = 1000 * 10.2%/2 = 51

n= 9*2 = 18 periods

price = coupon payment * PVIFA(r%,n) + facevalue * PVIF(r%,n)

1150 = 51 * PVIFA(r%,18) + 1000 * PVIF(r%,18)

using ytm calculator

YTM = 3.92%

pretax cost of debt = 2 * YTM = 7.84%

2)

after tax cost of debt = pretax cost of debt * (1-taxrate)

= 7.84 * (1- 0.3)

=5.49%

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