Question

Viserion, 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 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually.

If the tax rate is 22 percent, what is the aftertax cost of debt?

Answer 1

Information provided:

Time= 18 years*2= 36 semi-annual periods

Face value= future value= $1,000

Present value= 109%*1,000= $1,090

Coupon rate= 6%/2= 3%

Coupon payment= 0.03*1,000= $30

The pretax cost of debt is calculated by computing the yield to maturity.

The yield to maturity is computed by entering the below in a financial calculator:

FV= 1,000

PV= -1,090

N= 36

PMT= 30

Press the CPT key and I/y to compute the yield to maturity.

The value obtained is 2.61

Therefore, the pretax cost of debt is 2.61%*2=5.22%.

After tax cost of debt= Before tax cost of debt*(1- tax)

                                        = 5.22%*(1 – 0.22)

                                        = 4.07%.

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