Advance, Inc., is trying to determine its cost of debt. The firm has a debt issu

Question

Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 103 percent of face value. The issue makes semiannual payments and has a coupon rate of 8 percent annually.

Required:

(a) What is Advance’s pretax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Pretax cost of debt _____%

(b) If the tax rate is 36 percent, what is the aftertax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Aftertax cost of debt _____%

Explanation / Answer

A.     

Pretax cost of debt = Rate = 7.63%

B.

After tax cost of debt = Rate x (1-Tax)

= 7.63% x (1-36%)

= 4.88%

Working for Yield or Rate:

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

$1,000

PV = Present Value =

-$1,030

N = Total number of remaining payment periods =

13

PMT = Payment =

$80

CPT > I/Y = Rate =

                 7.6282

Convert Yield in annual and percentage form = Yield / 100

7.63%

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

$1,000

PV = Present Value =

-$1,030

N = Total number of remaining payment periods =

13

PMT = Payment =

$80

CPT > I/Y = Rate =

                 7.6282

Convert Yield in annual and percentage form = Yield / 100

7.63%

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