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J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 109 percent of face value. The issue makes semiannual payments and has a coupon rate of 4 percent annually. What is the company's pretax cost of debt?

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Answer:

2.95%

Explanation:

In this question, we use the Rate formula which is shown in the spreadsheet.  

The NPER represents the time period.  

Given that,  

Present value = $1,000 × 109% = $1,090

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

PMT = 1,000 × 4% ÷ 2 = $20

NPER = 10 years × 2 = 20 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this,  

The pretax cost of debt is 2.95%

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