Question

J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt...

J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has a coupon rate of 10 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            %

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

Homework Answers

Answer #1

Face Value = $1,000

Current Price = 108% * $1,000
Current Price = $1,080

Annual Coupon Rate = 10%
Semiannual Coupon Rate = 5%
Semiannual Coupon = 5% * $1,000
Semiannual Coupon = $50

Time to Maturity = 20 years
Semiannual Period to Maturity = 40

Let semiannual YTM be i%

$1,080 = $50 * PVIFA(i%, 40) + $1,000 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -1080
PMT = 50
FV = 1000

I = 4.56%

Semiannual YTM = 4.56%
Annual YTM = 2 * 4.56%
Annual YTM = 9.12%

Pre-tax Cost of Debt = 9.12%

After-tax Cost of Debt = 9.12% * (1 - 0.35)
After-tax Cost of Debt = 5.93%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt...
J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 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 % If the tax...
One Step, Inc., is trying to determine its cost of debt. The firm has a debt...
One Step, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 30 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has a coupon rate of 7 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 21 percent, what...
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt...
ICU Window, 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 104.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 5.6 percent annually. a. 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.) b. If the tax rate is...
One Step, Inc., is trying to determine its cost of debt. The firm has a debt...
One Step, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 110 percent of face value. The issue makes semiannual payments and has a coupon rate of 9 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 23 percent, what...
Drogo, Inc., is trying to determine its cost of debt. The firm has a debt issue...
Drogo, 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 104 percent of face value. The issue makes semiannual payments and has an embedded cost 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 % If the tax rate...
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt...
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with ten years to maturity that is quoted at 109.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 8 percent annually. 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 34...
Problem 14-6 Calculating Cost of Debt [LO2] Viserion, Inc., is trying to determine its cost of...
Problem 14-6 Calculating Cost of Debt [LO2] Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 27 years to maturity that is quoted at 96 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually. a. 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.)...
Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue...
Advance, 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 101 percent of face value. The issue makes semiannual payments and has a coupon rate of 12 percent annually. (a) What is Advance’s pretax cost of debt? (Round your answer to 2 decimal places. (e.g., 32.16))   Pretax cost of debt %    (b) If the tax rate is 34 percent, what is the aftertax...
Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue...
Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 8 years to maturity that is quoted at 96 percent of face value. The issue makes semiannual payments and has an embedded cost of 8 percent annually. Required: (a) What is the company's pretax cost of debt? (Do not round your intermediate calculations.) (b) If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round your...
Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue...
Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 94 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually.    Required:    (a) What is the company's pretax cost of debt? (Do not round your intermediate calculations.) (Click to select)11.45%10.20%10.36%11.34%10.91%    (b) If the tax rate is 35 percent, what is the aftertax cost...