Question

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.)
b.	If the tax rate is 21 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.)

Answer 1

Ans:-(a) In this part, we need to find the cost of debt that means YTM. we will use the rate function of excel to find the YTM.

Nper=27*2=54, Pmt=$1000*7%/2=$35,PV=96% * $1000 = 960, FV = $1000

Note:- we have multiplied by 2 because we need to find the annual YTM.

Therefore, the pre-tax cost of debt for the company is 7.34%

(b) The after-tax cost of debt will be given by YTM * (1 - Tax rate) = 7.34% * (1 - 0.21) = 5.80% (approx).

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