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

Question

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually

What is the companys pretax cost of debt?

If the tax rate is 35 percent, what is the aftertax cost of debt? (

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Nper = 20*2 = 40 (indicates the period)

PV = 1000*108% = 1080 (indicates the present value of bonds)

FV = 1000 (indicates the face value of bonds)

PMT = 1000*10%*1/2 = 50 (indicates semi-annual interest payment)

Rate = ? (indicates the pretax cost of debt)

Pretax Cost of Debt = Rate(Nper,PMT,PV,FV)*2 = Rate(40,50,-1080,1000)*2 = 9.123% or 9.12%

After Tax Cost of Debt = Pretax Cost of Debt*(1-Tax Rate) = 9.12*(1-35%) = 5.928% or 5.93%

Thanks.

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