Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt iss

Question

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 14 years to maturity that is quoted at 105 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually.

What is the company

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 14 years to maturity that is quoted at 105 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually.

Explanation / Answer

a)

pretax cost of debt = [100*4/200 + (100 - 105)/28]/(0.6*105 +0.4*100)]*2

= 0.02115*2

= 0.0423

4.23%

b)

aftertax cost of debt = 4.23*(1-0.35) = 2.75%

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