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Waller, inc., is trying to determine its cost of debt. the firm has a debt issue outstanding with 11 years to maturity that is quoted at 107 percent of face value. the issue makes semiannual payments and has an embedded cost of 8 percent annually. required: (a) what is the company's pretax cost of debt

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Answer:

7.08%

Explanation:

For computing the  pretax cost of debt we have to use the RATE formula i.e to be shown in the attachment below:

Given that,  

Present value = $1,000 Ă— 107% = $1,070

Assuming figure - Future value or Face value = $1,000  

PMT = 1,000 Ă— 8% Ă· 2 = $40

NPER = 11 years Ă— 2 = 22 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative

After applying the above formula, the pretax cost of debt is

= 3.54% Ă— 2

= 7.08%

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