Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue
ID: 2794706 • Letter: W
Question
Waller, 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 94 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually.
If the tax rate is 37 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.)
Waller, 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 94 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually.
Explanation / Answer
(A) Let's say Face value is 100 so P0=94
94 = 3.5(PVIFAR%,28) + 100(PVIFR%,28)
R = 3.855%
YTM = 3.855% × 2
YTM = 7.71%
(B) After tax cost of debt=Before Tax Kd*(1-t)
=7.71%(1-0.37)
=4.857% or say 4.86%
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