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1 August, 20:03

Advance, 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 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 10 percent. What is the company's pretax cost of debt?

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  1. 1 August, 20:08
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    R = 9.16%

    Explanation:

    Step 1. Given information.

    Let Pretax cost of debt = r Coupon rate 10%

    Step 2. Formulas needed to solve the exercise.

    The present value of r is considered taking into account the period of time of the exercise. In this case the period n=32 is because the amount is paid twice in a year, thus, n=16*2

    Step 3. Calculation and Step 4. Solution.

    Coupon = 10%*1000/2 = 50

    107%*1000 = 50 * (1-1 / (1+r/2) ^32) / (r/2) + 1000 / (1+r/2) ^32

    R = 9.16%
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