ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i
ID: 2707398 • 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 117.0 percent of face value. The issue makes semiannual payments and has an embedded cost of 11.0 percent annually.
What is ICUs pretax cost of debt?
If the tax rate is 34 percent, what is the aftertax cost of debt?
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 117.0 percent of face value. The issue makes semiannual payments and has an embedded cost of 11.0 percent annually.
What is ICUs pretax cost of debt?
4.14% 8.28% 17.00% 11.00% 11.22%
If the tax rate is 34 percent, what is the aftertax cost of debt?
7.26% 7.41% 5.47% 2.73% 11.22%Can someone please explain to me how to solve each problem, step by step?
Explanation / Answer
Hi,
Please find the answer as follows:
Part A:
Nper = 9*2 = 18 (indicates the time the number of interest payments are made during the life of the debt)
PMT = 1000*.11*1/2 = 55 (indicates the amount of interest payment made each period)
FV = 1000 (indicates the face value of the bond)
PV = 1000*117% = 1170 (indicates the present value of the bond)
Pretax Cost of Debt = Rate*(Nper,PMT,PV,FV) = Rate(18,55,-1170,1000) = 4.14%*2 (since payments are made semiannually( = 8.28%
Part B:
After Tax Cost of Debt = Pretax Cost of Debt*(1- tax rate) = 8.28*(1-.34) = 5.47%
Thanks.