Problem:
Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually.
Required:
Question 1: What is the company's pretax cost of debt?
Question 2: If the tax rate is 35 percent, what is the after-tax cost of debt?
Note: Provide support for rationale.