Question

ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 11 years to maturity that is quoted at 111 percent of face value. The issue makes semiannual payments and has an embedded cost of 8.2 percent annually.
a.	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.)
b.	If the tax rate is 24 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.)

Answer 1

COUPON RATE 8.20% YEARS TO MATURITY 11 NPER 22 (years to maturity x 2) PMT 41 (face value x coupon rate)/2 FACE VALUE $1,000.00 PRICE = PV = $1,110.00 RATE = 3.38% rate(nper,pmt,-pv,fv) rate(22,41,-1110,1000) YIELD TO MATURITY = RATE X 2 = [pretax cost of debt ] 6.77% (3.38%*2) after tax cost of debt = (YTM X (1-T) 5.14% [ Aftertax cost of debt ] [ 6.77%*(1-0.24) ]