Waller, Inc., is trying to determine its cost of debt. The firm has one bond issue outstanding with 9 years to maturity. The bond's price is quoted at 108 percent of face value. The issue pays a 8.00% annual coupon in semi-annual installments, and has a yield to maturity of 6.80%.
What is the company's pre-tax cost of debt? Leave as an APR. (Do not round your intermediate calculations.)
If the tax rate is 35 percent, what is the after-tax cost of debt? Leave as an APR. (Do not round your intermediate calculations.)
| a) | ||||||||||
| Company's pre-tax cost of debt | 6.80% | |||||||||
| Working: | ||||||||||
| Yield to maturity is the yield or return an investor earns if it holds investment till maturity. | ||||||||||
| Yield to maturity of Bond is the pre-tax cost of debt. | ||||||||||
| b) | ||||||||||
| After-tax cost of debt | 4.42% | |||||||||
| Working: | ||||||||||
| After-tax cost of debt | = | Before Tax cost of debt*(1-Tax Rate) | ||||||||
| = | 6.80% | *(1-0.35) | ||||||||
| = | 4.42% | |||||||||
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