Problem 12-6 Calculating Cost of Debt [LO 2] ICU Window, Inc., is trying to dete
ID: 2698919 • Letter: P
Question
Problem 12-6 Calculating Cost of Debt [LO 2]
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 114.0 percent of face value. The issue makes semiannual payments and has an embedded cost of 9.8 percent annually.
What is ICU%u2019s pretax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)
If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)
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 114.0 percent of face value. The issue makes semiannual payments and has an embedded cost of 9.8 percent annually.
Explanation / Answer
Requirement 1: 114= 4.9PVIFA(Kd,14)+100PVIF(Kd,14) Kd= (3.61x2)= 7.22% Pretax cost of debt= 7.22% Requirement 2: Aftertax cost of debt= 7.22(1-.35)= 4.693%