ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i
ID: 2629432 • Letter: I
Question
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 114 percent of face value. The issue makes semiannual payments and has an coupon rate of 9.8 percent annually.
What is ICU
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 114 percent of face value. The issue makes semiannual payments and has an coupon rate of 9.8 percent annually.
Explanation / Answer
re tax cost of debt = I + (N.P - Par value) / 1/2 (N.P + Par value)
= 9.8 + (100-114) / (214/2) = 9.8 + 14 / 107
= 23.8/107 = 22.25 %
After tax cost of debt = 22.25% ( 1 - 0.35) = 14.46%
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