Question

Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 103 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. a. What is the company’s pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the tax rate is 21 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Viserion, Inc.

Cost of debt:

Premium on Debt = 3% (103 - 100%)

Amortization of the premium = 3%/23 = 0.13%

Interest cost = 6%

Cost of debt (pretax) = 6% - 0.13% = 5.87%

Explanation:

The cost of debt is the difference between the interest expense in percentage that Viserion, Inc. pays annually and the premium on the debt that must be amortized over the life of the debt.  Since Viserion, Inc. pays 6% annually or 3% semiannually on the debt and amortizes 0.13% of the debt premium, the amortization rate is taken away from the annual interest to get the cost of debts in percentage terms.