ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i
ID: 2623599 • Letter: I
Question
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with nine years to maturity that is quoted at 115 percent of face value. The issue makes semiannual payments and has an embedded cost of 10.2 percent annually.
What is ICU
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with nine years to maturity that is quoted at 115 percent of face value. The issue makes semiannual payments and has an embedded cost of 10.2 percent annually.
Explanation / Answer
coupon payment = 1000 * 10.2%/2 = 51
n= 9*2 = 18 periods
price = coupon payment * PVIFA(r%,n) + facevalue * PVIF(r%,n)
1150 = 51 * PVIFA(r%,18) + 1000 * PVIF(r%,18)
using ytm calculator
YTM = 3.92%
pretax cost of debt = 2 * YTM = 7.84%
2)
after tax cost of debt = pretax cost of debt * (1-taxrate)
= 7.84 * (1- 0.3)
=5.49%