Question

Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has a coupon rate of 4 percent. 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.) alculate Pretax cost of debt as % If the tax rate is 35 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.)    Calculate Aftertax cost of debt as percent.

Answer 1

1	Face value (FV)	$                                       1,000
2	Coupon rate	4.00%
3	Number of compounding periods per year	2
1*2/3	Interest per period (PMT)	$                                       20.00
	Bond price (PV)	$                               (1,080.00)
4	Number of years to maturity	18
5 = 4*3	Number of compounding periods till maturity (NPER)	36
	Bond yield to maturity	RATE(NPER,PMT,PV,FV)*2
	Bond yield to maturity	3.40%
	(Pre-tax cost of debt)
	Bond yield to maturity	2.21%
	(After-tax cost of debt)	3.40%*(1-35%)