Advance, Inc., is trying to determine its cost of debt. The firm has a debt issu

Question

Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 9 percent annually.

What is Advance's pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 9 percent annually.

Explanation / Answer

Face value (FV) $                                  1,000.00 Coupon rate 9.00% Number of compounding periods per year 2 Interest per period (PMT)                                            45.00 Bond price (PV) $                               (1,070.00) Number of years to maturity 20 Number of compounding periods till maturity (NPER) 40 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 8.28% (Pretax cost of debt) Cost of debt 5.38% (After tax cost of debt) 8.28%*(1-35%)

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