Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue

Question

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 104 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually.

(a) What is the company's pretax cost of debt? (Do not round your intermediate calculations.

(b) If the tax rate is 33 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 12 years to maturity that is quoted at 104 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually.

(a) What is the company's pretax cost of debt? (Do not round your intermediate calculations.

(b) If the tax rate is 33 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.)

Explanation / Answer

1 Face value (FV) $                                        1,000 2 Coupon rate 7.00% 3 Number of compounding periods per year                                                    2 1*2/3 Interest per period (PMT) $                                        35.00 Bond price (PV) $                               (1,040.00) 4 Number of years to maturity 12 5 = 4*3 Number of compounding periods till maturity (NPER)                                                  24 Bond yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond yield to maturity 6.51% (Pre-tax cost of debt) Bond yield to maturity 4.36% (After-tax cost of debt) 6.51%*(1-33%)

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