Question

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? |

(b) |
If the tax rate is 35 percent, what is the aftertax cost of
debt? |

Answer #1

**a. Pretax cost of debt is computed as shown
below:**

**Just plug the below figures in the financial
calculator:**

N = 16 (8 x 2)

PMT = 40 (8% / 2 x 1,000)

PV = - 960 (1,000 x 96%)

FV = 1,000

Now, press CPT and then I/Y. It will give I/Y equal to

**= 4.352259982%**

**Now we need to multiply the above rate by 2 to get it on
annual basis as shown below:**

= 4.352259982% x 2

**= 8.70% Approximately**

**b. The after tax cost of debt is computed as
follows:**

= 4.352259982% x 2 x (1 - 0.35)

**= 5.66% Approximately**

Feel free to ask in case of any query relating to this question

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