CU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 11 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 6.8 percent annually.
What is the company’s pretax cost of debt?
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.) | |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =11x2 |
108 =∑ [(6.8*100/200)/(1 + YTM/200)^k] + 100/(1 + YTM/200)^11x2 |
k=1 |
YTM% = 5.81 = pre tax cost of debt |
After tax rate = YTM * (1-Tax rate) |
After tax rate = 5.81 * (1-0.22) |
After tax rate = 4.53 |
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