Question

One Step, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 29 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 6 percent.

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.)

If the tax rate is 25 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 6.00% YEARS TO MATURITY 29 NPER 58 (years to maturity x 2) PMT 30 (face value x coupon rate)/2 FACE VALUE $1,000.00 PRICE = PV = $1,070.00 RATE = 2.76% rate(nper,pmt,-pv,fv) rate(58,30,-1070,1000) YIELD TO MATURITY = RATE X 2 = 5.51% (2.76%*2) after tax cost of debt = 4.14% Aftertax cost of debt] [YTM X (1-1) [5.51%*(1-0.25)]