ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i
ID: 2707412 • 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 113.0 percent of face value. The issue makes semiannual payments and has an embedded cost of 9.4 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 113.0 percent of face value. The issue makes semiannual payments and has an embedded cost of 9.4 percent annually.
What is ICU
Explanation / Answer
coupon payment = 9.4%*1000/2=$47
price = 113%*1000= 1130
Let pretax cost of debt = r
1130 = 47/(1+r/2) + 47/(1+r/2)^2 + 47/(1+r/2)^3 ...............1047/(1+r/2)^18
pretax cost of debt, r= 7.40%
aftertax cost of debt = 7.4%*(1-38%)= 4.59%