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Mudvayne, Inc
Mudvayne, 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 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the company's pretax cost of debt? If the tax ate is 35 percent; what is the aftertax cost of debt?
Expert Solution
We can calculate the pretax cost of debt by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Pretax cost of debt (semiannual)
Nper = 18*2 = 36 periods (semiannual)
Pmt = Coupon payments = $1,000*6%/2 = $30
PV = $1,000*107% = $1,070
FV = $1,000
Substituting the values in formula:
= rate(36,30,-1070,1000)
= 2.69%
Pretax cost of debt = Rate * 2
= 2.69% * 2
= 5.39%
Computation of the after tax cost of debt:-
After tax cost of debt = Pretax cost of debt * (1 - Tax rate)
= 5.39% * (1 - 35%)
= 3.50%
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