Waller, Inc., is trying to determine its cost of debt. The firm has one bond iss

Question

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.)

Explanation / Answer

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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