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    momalbunny's Avatar
    momalbunny Posts: 1, Reputation: 1
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    #1

    Oct 28, 2009, 07:37 AM
    calculate cost of debt.
    Firm has a debt issue outstanding with 12 yrs to mature that is quoted at 105 percent of face value. The issue makes semiannual payments and has embedded cost of 8 percent annually. What is the company's pre tax cost of debtand what is the company's after tax cost of debt?
    Ithappenstoall's Avatar
    Ithappenstoall Posts: 363, Reputation: 37
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    #2

    Oct 28, 2009, 08:02 AM

    using the WACC formula you have no value for the cost of so equity therefore WACC is cost of debt . Use that formula to find your cost of debt.

    You will need to know the tax percent
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #3

    Oct 28, 2009, 10:44 AM
    The pre-tax cost of the debt will be that discount rate that makes the present value of the twelve remaining coupon payments, and the maturity payoff amount 12 years hence, equal to 105 (use 8 and 100 for the coupon and the maturity payoff amounts, respectively). Thus, you have all the info you need to run through the PV calculations, using trial-and-error until you zero in on the discount rate that produces the PV of 105.

    For the after-tax cost, just as Ithappenstoall mentioned, you'll also need the firm's tax rate.
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