Question

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 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

Using financial calculator BA II Plus - Input details:	#
FV = Future Value / Face Value =	-$1,000.00
PV = Present Value = Face value x Quoted price% = 1000 x 107% =	$1,070.00
N = Number of years remaining x frequency =	18
PMT = Payment = Coupon / frequency =	-$80.00
CPT > I/Y = Rate per period or YTM per period =	7.2895
Convert Yield in annual and percentage form = Yield*frequency / 100 =	7.29%
After tax Cost of debt = YTM x (1-Tax) = Yield x (1-35%) =	4.74%