P14-6 Calculating Cost of Debt [LO2] Waller, Inc., is trying to determine its co

Question

P14-6 Calculating Cost of Debt [LO2]

Waller, 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 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 11 percent annually. Note the embedded cost refers to the coupon rate.

If the tax rate is 37 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.)

Waller, 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 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 11 percent annually. Note the embedded cost refers to the coupon rate.

Explanation / Answer

Due To Semi Annual Payments

N(no. Of Periods ) =13*2=26

PV= 109

PMT(Coupon)= 11/2= 5.5 %

FV(Full Value on Expiration)=100

Using a Calculator Find I/Y=4.88 (This will be semi annual rate)

Multiply it with 2 You get Annual YTM(Yield To Maturity) This is the before tax cost of debt to a firm.= 9.76%

After tax Cost of Debt is PRetax cost*(1-Marginal tax rate)

9.76(1-.37)= 6.15%

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