Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 28 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually. a. What is the company’s pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)
b. If the tax rate is 22 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

3.60%

2.81%

Explanation:

The pretax cost of debt can be derived from rate excel function as shown below:

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

nper is the number of semiannual coupons of the bond i.e 28 years*2=56 coupons

pmt is the semiannual coupon amount=$1000*4%*6/12=$20

pv is the current bond's price=$1000*107%=$1070

fv is the face value of the bond=$1000

=rate(56,20,-1070,1000)=1.80%

semiannual pretax cost of debt is1.80%

annual pretax cost of debt=1.80% *2=3.60%

after tax cost of debt=3.60%*(1-22%)=2.81%

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explanation: