Calculating Cost of Debt. ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 6.1 percent annually. What is ICU's pretax cost of debt? If the tax rate is 38 percent, what is the after tax cost of debt?
Suppose face value of debt 1000
Market value of debt M.V. 1080
Interest half yearly I 30.50
Cost of Debt Annual - Pretax Kd (pretax) 4.74%
Cost of Debt Annual - After tax Kd (1-t) 2.94%
Market value of debt -1080
1 Installment 30.5
2 Installment 30.5
3 Installment 30.5
4 Installment 30.5
5 Installment 30.5
6 Installment 30.5
7 Installment 30.5
8 Installment 30.5
9 Installment 30.5
10 Installment 30.5
11 Installment 30.5
12 Installment 30.5
13 Installment 30.5
14 Installment 1030.5
IRR semiannually 2.372%
IRR annually 4.74%