Question

Waller, 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 100 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually.

  

a)	What is the company's pretax cost of debt? (Do not round your intermediate calculations.)
	(Click to select)10.40%9.50%10.00%10.20%10.50%

  

(b)	If the tax rate is 36 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.)
	(Click to select)6.66%6.72%6.08%6.40%5.15%

Answer 1

a)

as bond price = par value pretax cost of debt = embedded cost = 10%

b)

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 10*(1-0.36)

= 6.4