Advance, 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 104 percent of face value. The issue makes semiannual payments and has a coupon rate of 4 percent annually.a. What is Advance's pretax cost of debt?b. If the tax rate is 35 percent, what is the aftertax cost of debt?
1 answer:
Answer:
a. 3.56%
b. 2.31%
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 = $1,040
Assuming figure - Future value or Face value = $1,000
PMT = 1,000 × 4% ÷ 2 = $20
NPER = 11 years × 2 = 22 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 = 2 × 1.78% = 3.56%
2. And, the after tax cost of debt would be
= Pretax cost of debt × ( 1 - tax rate)
= 3.56% × ( 1 - 0.35)
= 2.31%
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