Question

Mudvayne, Inc, is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually. What is the company's pretax cost of debt? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16)) Cost of debt If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16) Cost of debt %

Answer 1

Face value = $1000

Price = $1080

Coupon rate = 9%

Years to maturity = 10 years

NPER = 20

PMT = 1000 × 9%/2 = $45

Using excel rate function = RATE(20,45,-1080,1000)

= 3.92%

A) pretax cost of debt = 3.92% × 2 = 7.84%

B) after tax cost of debt = 7.84% × (1-0.35) = 5.096%

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