Question

Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the company's pretax cost of debt? If the tax rate is 35 percent, what is the aftertax cost of debt? Settlement Maturity Price (% of par) Coupon rate Payments per year Tax rate 01/01/00 01/01/18 107 6% 35% Complete the following analysis. Do not hard code values in your calculations. Pretax cost Aftertax cost of debt

Answer 1

Nper = 18*2 = 36

Pmt = 100*6%/2 = 3

PV = -107

Fv = 100

Or

Alternative method

Pretax cost = (coupon payment +((face value - price)/number of years to maturity))/(( face value - price)/2) = (6+((100-107)/18))/((100+107)/2) = 5.42%

After tax cost = 5.42%*(1-35%) = 3.52%