Question

J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 14 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has a coupon rate of 8 percent annually. What is the company's pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax cost of debt - 7% If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt %

Answer 1

Hello Sir/ Mam

(a) Pre tax cost = 7.31%

Given that:

Periods to Maturity = 14*2 = 28

Future Value = $1,000

P.V. = $1,060

Coupon Payments = $40

Using excel function, "=RATE(14*2,-8*1000/2,1060,-1000,0)*2", we get Rate = 7.31%

(b) Post tax cost = 4.75%

Post tax cost = 7.31%*(1-35%) = 4.75%

I hope this solves your doubt.

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