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Stancorp has a $14
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?
Expert Solution
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%
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