Problem 12-6 Calculating Cost of Debt [LO 2] ICU Window, Inc., is trying to dete

Question

Problem 12-6 Calculating Cost of Debt [LO 2] ICU Window, Inc., is trying to determine it debt. The firm has a debt issue outstanding with eight years to maturity that is quoted at 110.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 8.4 percent annually What is the company's pretax cost of debt? (Do not round intermediate calculations and enter your ans Pretax cost of debt If the tax rate is 38 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and ent as a percent rounded to 2 decimal places, e.g, 32.16.) er your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Aftertax cost of debt References Cniculatinn Gost of Debt [LO 2

Explanation / Answer

Answer:

Face Value = $1,000

Current Price = 110.50% * $1,000
Current Price = $1,105

Annual Coupon Rate = 8.4%
Semiannual Coupon Rate = 4.2%
Semiannual Coupon = 4.2% * $1,000
Semiannual Coupon = $42

Time to Maturity = 8 years
Semiannual Period to Maturity = 16

Let semiannual YTM be i%

$1,105 = $42 * PVIFA(i%, 16) + $1,000 * PVIF(i%, 16)

Using financial calculator:
N = 16
PV = -1105
PMT = 42
FV = 1000

I = 3.34%

Semiannual YTM = 3.34%
Annual YTM = 2 * 3.34%
Annual YTM = 6.68%

Pretax Cost of Debt = 6.68%

After-tax Cost of Debt = 6.68% * (1 - 0.38)
After-tax Cost of Debt = 4.14%

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