ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i
ID: 2753935 • Letter: 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 110.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 8.4 percent annually.
What is ICU’s pretax cost of debt?
If the tax rate is 38 percent, what is the aftertax cost of debt?
References
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 110.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 8.4 percent annually.
Explanation / Answer
Face value (FV) $ 1,000.00 Coupon rate 8.40% Number of compounding periods per year 2 Interest per period (PMT) 42.00 Bond price (PV) $ (1,105.00) Number of years to maturity 8 Number of compounding periods till maturity (N) 16 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 6.68% (Pre-tax cost of debt) Bond Yield to maturity 4.14% (After-tax cost of debt) 6.68%*(1-38%)