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 14 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 8 percent annually.

What is the company

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 14 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 8 percent annually.

Explanation / Answer

a. Coupon payment = 8%*1000/2= 40

Let cost of debt be r

Price =106%*1000 = 1060

1060 = 40/(1+r) + 40/(1+r)^2 + 40/(1+r)^3.........1040/(1+r)^28

Cost of Debt = 7.31%

aftertax cost of debt = 7.31%*(1-35%) = 4.75%

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