Question

Icu window, inc., is trying to determine its cost of debt. the firm has a debt issue outstanding with ten years to maturity that is quoted at 113.5 percent of face value. the issue makes semiannual payments and has an embedded cost of 9.6 percent annually. what is the company's pretax cost of debt?

Answer 1

Pre-tax cost of debt is calculated as -

Yield to maturity = [ Coupon payment + ( Face value - Price) / Number of periods ] / [ ( Face value - Price) / 2 ]

Coupon payment = 9.6 % / 2 * 1000 = $ 48

Face Value = 1000

Price = 113.5 % * $ 1000 = $ 1135

Number of periods = 20 (i.e. 10 years *2 )

Yield to maturity = [ $ 48 + ( $ 1000 - $ 1135) / 20] / [ ($ 1000 + $ 1135) /2 ]

Yield to maturity = 3.86 %

Annual yield to maturity = 3.86 % * 2 = 7.72 %