ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 11 years to maturity that is quoted at 108% of face value. The issue makes semiannual payments and has an embedded cost of 6.8 percent annually. a. What is the company’s pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the tax rate is 22% , what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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andromache andromache · Answer 1 · 2019-12-10T10:20:25+01:00

Answer:

1. 5.80%

2. 4.52%

Explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.

The NPER represents the time period.

Given that,

Present value = $1,000 × 108% = $1,080

Assuming figure - Future value or Face value = $1,000

PMT = 1,000 × 6.8% = $68

NPER = 11 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after solving this,

1. The pretax cost of debt is 5.80%

2. And, the after tax cost of debt would be

= Pretax cost of debt × ( 1 - tax rate)

= 5.80% × ( 1 - 0.22)

= 4.52%