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Stancorp has a $14

Finance

Stancorp has a $14.4 million debt issue? outstanding, with a 6.1% coupon rate. The debt has? semi-annual coupons, with the next coupon is due in six months. The debt matures in five years. It is currently priced at 96% of par value.

a. What is? Stancorp's pre-tax cost of? debt? Note: Compute the effective annual return. (Round to 4 decimal)

b. If Stancorp faces a 30% tax? rate, what is its? after-tax cost of? debt?

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a) Computation of Cost of Debt using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)*2

Here,

Rate = Pretax Cost of Debt = ?

Nper = 5 years * 2 = 10 Periods 

PMT = $14,400,000*6.1%/2 = $439,200

PV = $14,400,000*96% = $13,824,000

FV = $14,400,000

Substituting the values in formula:

=rate(10,439200,-13824000,14400000)*2

Rate or Pretax Cost of Debt = 7.06%

Effective Annual Return = (1+7.06%/2)^2 -1 = 7.19% 

 

b) Computation of After-tax Cost of Debt:

After-tax Cost of Debt = Pretax Cost of Debt*(1-Tax Rate)

= 7.19%*(1-30%)

After-tax Cost of Debt = 5.03%