Mudvayne, inc., is trying to determine its cost of debt. the firm has a debt issue outstanding with 14 years to maturity that is quoted at 106 percent of face value. the issue makes semiannual payments and has an embedded cost of 8 percent annually. what is the company’s pretax cost of debt? (do not round intermediate calculation and round your answer to 2 decimal places. (e. g., 32.16)) cost of debt % if the tax rate is 35 percent, what is the aftertax cost of debt?

Pre-tax   Cost of debt 7.35%

After-tax Cost of debt 4.78%

Explanation:

We will calculate the cost of debt which is the rate at which the present value of the coupon payment and maturirty matches with the market value.

Coupon payment =100 x 8% / 2 = 4

Face value=100

market Value = P=106

n=total payment = 14 years x 2 payment per year = 28

YTM = 3.6754508%

As  this rate will be semiannually we multiply by 2

3.6754508 x 2 =7.3509015 = 7.35%

Then we calcualte the cost of debt after tax:

pretax (1-t)

7.35 (1-.35) = 7.35(0.65) =4,7775‬ = 4.78%

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