Problem 12-6 Calculating Cost of Debt [LO 2] cu window, Inc., is trying to deter

Question

Problem 12-6 Calculating Cost of Debt [LO 2] cu window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with ten years to maturity that is quoted at 117.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 11.2 percent annually. What is the company's pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax cost of debt If the tax rate is 30 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) Aftertax cost of debt

Explanation / Answer

Answer a) The cost of debt = 11.2%

Answer b) After tax cost of debt = 11.2%*(1-tax rate) = 11.2%*(1-0.30) = 7.84%

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