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31 July, 18:35

J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has a coupon rate 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?

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  1. 31 July, 18:57
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    After tax cost of debt = 5.44 * (1-0.35) % = 3.54%

    Explanation:

    PV = 106

    PMT = 6/2 = -3

    N = 16*2 = 32 semi annual

    FV = - 100

    Semi annual yield = 2.72%

    Annual cost of debt = 2.72%*2 = 5.44%

    After tax cost of debt = 5.44 * (1-0.35) % = 3.54%

    Using Rate function in Excel or Financial calculator
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