Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue

Question

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually. Note the embedded cost refers to the coupon rate.

Required:

(a) What is the company's pretax cost of debt? (Do not round your intermediate calculations.)


(b)

If the tax rate is 36 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.)

Explanation / Answer

1.semiannual payments=9%*1000/2= $45 Price = 106%*1000=$1060 1060 = $45/(1+r/2) +$45/(1+r/2)^2 ............$1045/(1+r/2)^30 r=8.29% company's pretax cost of debt = 8.29% 2. aftertax cost of debt=8.29%*(1-36%)=5.31%

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.