ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i

Question

ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with eight years to maturity that is quoted at 108.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 7.6 percent annually. Requirement 1: What is ICU's pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Proetax cost of dob! Requirement 2: If the tax rate is 40 percent, what is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Aftertax cost of debt

Explanation / Answer

R.1

The pretax cost of debt :

      = I + (NP – Par value ) / ½ (NP + Par value)

      = 7.6 + (100-108.5) / ( 208.5 /2)

     = 7.6 + (8.5 / 104.25 )

     = 16.1 / 104.25

     = 15.44%

R.2

After tax cost of debt = 15.44% (1- 0.40)

                                       = 9.26 %

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