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 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’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.) Pretax cost of debt % 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.) Aftertax cost of debt %

Explanation / Answer

N 28

PV105

Coupon 2

Yield 3.54% is pretax cost of debt

Post tax cost of debt is (1-0.35)*3.54% = 2.30%

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