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?

Excel Sheet:

A B

1 Settlement 1/1/00

2 Maturity 1/1/18

3 Price (% of Par) 107

4 Coupon rate 6%

5 Payments per year 2

6 Tax rate 35%

Do not hardcode values, need formulas. (I've already tried this formula =RATE(36,30,-1070,1000,0), it doesn't work. It should work, but it doesn't. I don't think the system likes how I've put in the formula, maybe it's wanting the formula a specific way).

Pretax Cost - ?

Aftertax cost of debt - ?

Answer 1

Numer of years = 18

Number of Semi Annual Periods = 18 * 2 = 36

Semi Annual Coupon Payment = 6% * 1,000 * 0.5 = 30

FV = 1,000

PV = 1,070

Book1 - Excel Insert Page LayoutFormulas Data Review View Tell me what you want to d.o.. File Home Cut Percentage Calibri Format Painter Blu▼田·ク. Clipboard Paste Number Font Alignment ㄨ ˇ 丘 =RATE 36,30,-1070, 1000,0) A1 2.69% 10

As you can see, by putting the values in excel,

we get I = 2.69%

YTM = 2.69% * 2

YTM = 5.39%

Pre-tax cost of debt = 5.39%

After tax cost of debt = 5.39% * (1 - 35%)

After tax cost of debt = 3.50%