Question

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 105 percent of face value. The issue makes semiannual payments and has a coupon rate of 10 percent annually. Required: (a) What is Advance's pretax cost of debt? (Do not include the percent sign Round your answer to 2 decimal places. (e.g., 32.16) Pretax cost of debt (b) If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not include the percent sign Round your answer to 2 decimal places. (e.g., 32.16) Aftertax cost of debt

Answer 1

a. 9.39%

b. 6.10%

Step-by-step explanation:

The NPER shows the time period or number of years

Provided that,

Present value = $1,000 × 105% = $1,050

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

PMT = 1,000 × 10% ÷ 2 = $50

NPER = 16 years × 2 = 32 years

The formula is presented below:

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

The present value always comes in negative amount while applying the rate formula

So, after calculations, the rate would be equal to

a. The pretax cost of debt is 9.39%

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

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

= 9.39% × ( 1 - 0.35)

= 6.10%