Question

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 8 years to maturity twith a current price of $1042. The issue makes semiannual payments and has coupon rate of 8 percent. If the tax rate is 0.40, what is the pretax cost of debt? Enter the answer with 4 decimals (e.g. 0.0123)

Answer 1

Assuming the face value to be $1000

price of debt = 1042

Coupon payment = 0.08 * 1000 = 80 /2 = 40 ( since it is a semi annual bond,we divide by 2)

number of periods = 8 * 2 = 16

Using a financial calculator, pre tax cost of debt = 7.2977%

Keys to use in a financial calculator: PV = -1042, FV = 1000, N = 16, PMT = 40, CPT I/Y.

When you click on CPT I/Y you get 3.64883. to annualze this, multiply by 2. 3.64883 * 2 = 7.2977%

After tax cost of debt = 0.072977 ( 1 - 0.4)

After tax cost of debt = 0.043786 or 4.3786%