Question

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 103 percent of face value. The issue makes semiannual payments and has an embedded cost (i.e. a coupon rate as an APR) of 7 percent annually.

  

Required:

(a)	What is the company's pre-tax cost of debt as an APR? (Do not round your intermediate calculations.)
	a. 6.65%   b. 7.20%   c. 6.32%   D. 6.92%   e. 6.98%

  

(b)	If the tax rate is 36 percent, what is the after-tax cost of debt as an APR? (Do not round your intermediate calculations.)
	a. 4.26%   b. 3.23%   c. 4.47%   d. 4.04% e. 4.43%

Answer 1

COUPON RATE 7.00% YEARS TO MATURITY 13 NPER 26 (years to maturity x 2) PMT 35 (face value x coupon rate)/2 FACE VALUE $1,000.00 PRICE = PV = $1,030.00 RATE = 3.33% rate(nper,pmt,-pv,fv) rate(26,35,-1030,1000) YIELD TO MATURITY = RATE X 2 = [pretax cost of debt] 6.65% [3.33%*2) after tax cost of debt = [YTM X (1-T) 4.26% [Aftertax cost of debt] [6.65%*(1-0.36)]