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 11 years to maturity that is quoted at 104 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually.

What is the company’s pretax cost of debt?

If the tax rate is 35 percent, what is the aftertax cost of debt?

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 11 years to maturity that is quoted at 104 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually.

What is the company’s pretax cost of debt?

Explanation / Answer

Hi,

Please find the answers as follows:

Rate = ?

Nper = 11*2 = 22

Pmt = 1000*.04*6/12 = 20

PV = 1040

FV = 1000

Rate = PV(22, 20, -1040, 1000) = 1.78*2 = 3.56%

Pretax cost of debt = 3.56%

Aftertax cost of debt = 3.56*(1-.35) = 2.31%

Thanks.

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