Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 27 years to maturity that is quoted at 92 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 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 25 percent, 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.)
Explanation:
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 25 percent, 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.)
Explanation:
The pretax cost of debt is the YTM of the company’s bonds, so:
|
| P0 = $920 = $35(PVIFAR%,54) + $1,000(PVIFR%,54) |
| R = 3.854% |
| YTM = 2 × 3.854% = 7.71% |
| And the aftertax cost of debt is: |
| RD = .0771(1 – .25) |
| RD = .0578, or 5.78% |
