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Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue...

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Finance

Waller, Inc., is trying to determine its cost of debt. The firmhas a debt issue outstanding with 14 years to maturity that isquoted at 96 percent of face value. The issue makes semiannualpayments and has an embedded cost of 9 percent annually. Required:(a) What is the company's pretax cost of debt? (Do not round yourintermediate calculations.) (b) If the tax rate is 34 percent, whatis the aftertax cost of debt? (Do not round your intermediatecalculations.)

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3.8 Ratings (432 Votes)

a.Information Provided:

Face value= future value= $1,000

Present value= 96%*1,000= $960

Coupon arte= 9%/2= 4.50%

Coupon payment= 0.045*1,000= $45

Time= 14 years*2= 28 semi-annual periods

The pretax cost of debt is calculated by computing the yield to maturity.

The below has to be entered in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -960

PMT= 45

N= 28

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 4.7616.

Therefore, the pretax cost of debt is 4.7616%82= 9.5231 9.52%.

b.After tax cost of debt= Before tax cost debt*(1- tax)

                                    = 9.52%*(1-0.34)

                                     = 6.28%.

In case of any query, kindly comment on the solution.
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Transcribed Image Text

Waller, Inc., is trying to determine its cost of debt. The firmhas a debt issue outstanding with 14 years to maturity that isquoted at 96 percent of face value. The issue makes semiannualpayments and has an embedded cost of 9 percent annually. Required:(a) What is the company's pretax cost of debt? (Do not round yourintermediate calculations.) (b) If the tax rate is 34 percent, whatis the aftertax cost of debt? (Do not round your intermediatecalculations.)

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