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home / study / business / finance / questions and answers / drogo, inc., is trying to determine its cost of ... Question Drogo, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 104 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually.

What is the company’s pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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

Explanation / Answer

The pretax cost of debt is the YTM of the company’s bonds, so:

P0 = $1,080 = $50 (PVIFR%,24 ) +$1,000 (PVIFR%,14 )

R = 4.72%

YTM = 2*4.72%

YTM = 9.44%

and the after tax cost of debt

RD = 0.0944 (1-0.35)

= 0.06136 or 6.136%

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