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 12 years to maturity that is quoted at 110 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.)

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 110 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually.

Explanation / Answer

Face value (FV) 1,000 Coupon rate 10.00% Number of compounding periods per year 1 Interest per period (PMT)                                              100.00 Bond proceeds (PV) -                                       1,100.00 Number of years to maturity 12 Number of compounding periods till maturity (NPER) 12 Bond Yield to maturity RATE(NPER,PMT,PV,FV) Bond Yield to maturity 8.63% (Pre-tax cost of debt) RATE(12,100,-1100,1000) After tax cost of debt 5.61% 8.63%*(1-35%)

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