Viserion, inc., is trying to determine its cost of debt. the firm has a debt issue outstanding with 25 years to maturity that is quoted at 91 percent of face value. the issue makes semiannual payments and has an embedded cost of 5 percent annually. a) what is the company's pretax cost of debt? b) if the tax rate is 24 percent, what is the aftrtax debt?

Pretax    =  5.61%

After tax = 4.26%

Explanation:

The cost of debt will be the Yield to maturity of the bonds.

91 = present values of the 25 year annuity + present value of the maturity

There is no formula for exact YTM

we can either use excel or calculate by approximation:

In this case we will calcualte the YTM by aprroximation

C=25 cuopon payment 1,000 x 5% / 2 becayse paymenr are semiannually

F=1000 the face value is 1,000

P=910  the present value or market value is 91% of the face value

n=50   25 year at 2 payment per year

dividend26.8

divisor955

YTM5.6125654%

This will be the pretax cost of debt

then we calculate the after tax cost of debt

pre-tax cost of debt ( 1 - t ) = after-tax

5.61% ( 1 - .24 ) = 4,2636