ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt i
ID: 2755266 • 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 percent of face value. The issue makes semiannual payments and has an embedded cost of 11 percent annually.
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).)
If the tax rate is 34 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).)
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 percent of face value. The issue makes semiannual payments and has an embedded cost of 11 percent annually.
Explanation / Answer
1)
Pretax cost of debt = rate(nper,pmt,pv,fv)*2
Nper (indicates the semi annual period) = 9*2 = 18
PV (indicates the price) = 117%*1000 = 1170
PMT (indicate the semi annual payment) = 1000*11%*1/2 = 55
FV (indicates the face value) = 1000
Rate (indicates YTM) = ?
Pretax cost of debt = rate( 18,55,-1170,1000)*2
Pretax cost of debt = 8.28%
2)
Aftertax cost of debt = Pretax cost of debt *(1-tax rate)
Aftertax cost of debt = 8.28%*(1-34%)
Aftertax cost of debt = 5.46%