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

Question

Drogo, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 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

Face value (FV) $                                  1,000.00 Coupon rate 4.00% Number of compounding periods per year 2 Interest per period (PMT)                                            20.00 Bond price (PV) $                               (1,090.00) Number of years to maturity 10 Number of compounding periods till maturity (N) 20 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 2.95% (Pre-tax cost of debt) Bond Yield to maturity 1.92% (After-tax cost of debt) 2.95%*(1-35%)

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