Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt iss

Question

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 5 percent annually.

What is the company

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 5 percent annually.

Explanation / Answer

Answer:

Pretax cost of debt = Interest rate =5%

Posttax cost of debt =   Interest rare * (1-tax rate )

=5% * (1-0.35)

= 3.25%

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