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

Question

a) Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the company’s pretax cost of debt? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16))

Cost of debt %

b) If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Cost of debt %

Explanation / Answer

Solution :

COst of debt = coupon interest + Face value - price / n / Face value + price /2

n= no of years since semi annual therefore the n = 32 years and rate = 3%

Face value = 100 and price = 106

Cost of debt = 3 + 100-106/32/ 100+106/2

= (96 + 6)/32/ 206/2

=204/206*32

=204/6592

Cost of debt pretax = 3.09%

Cost of debt post tax = 3.09%*(1- tax rate )

= 3.09*(1-.35)

= 3.09% *(.65)

= 2.011%

Thank you.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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