ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i
ID: 2707798 • Letter: I
Question
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with ten years to maturity that is quoted at 113.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 9.6 percent annually.
Requirement 1:
What is ICU
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with ten years to maturity that is quoted at 113.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 9.6 percent annually.
Explanation / Answer
If par value=1000, semiannual payment = 9.6%*1000/2 = 48
Current value = 113.5%*1000 = 1135
No of years = 10
Pretax cost of debt can be calculated in Excel as =RATE(10*2,-48,1135,-1000)*2. This is equal to 7.64%
Post-tax cost of debt = pretax cost*(1-tax rate) = 7.64%*(1-40%) = 4.59%
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