Question

ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 9 years to maturity that is quoted at 110 percent of face value. The issue makes semiannual payments and has an embedded cost of 7.8 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 22 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.) a. Pretax cost of debt b. Aftertax cost fo debt

Answer 1

$1,000 7.8% А 1 Par Value 2 Coupon rate 3 Years to Maturity 4 Current price 5 Frequency 6 7 YTM (pretax cost of debt) 8 Tax rate 9 Post tax cost of debt 10 $1,100.00 2 semi-annual 6.33% 22% 4.93%

1000 0.078 =B1*110% 1 Par Value 2 Coupon rate 3 Years to Maturity 4 Current price 5 Frequency 6 7 YTM (pretax cost of debt) 8 Tax rate 9 Post tax cost of debt semi-annual =B5*RATE(B3*B5,B2*B1/B5,-B4,B1) 0.22 =B7*(1-B8) 10