Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has a coupon rate of 10 percent. What is the company's pretax cost of debt?

R = 9.16%

Explanation:

Step 1. Given information.

Let Pretax cost of debt = r Coupon rate 10%

Step 2. Formulas needed to solve the exercise.

The present value of r is considered taking into account the period of time of the exercise. In this case the period n=32 is because the amount is paid twice in a year, thus, n=16*2

Step 3. Calculation and Step 4. Solution.

Coupon = 10%*1000/2 = 50

107%*1000 = 50 * (1-1 / (1+r/2) ^32) / (r/2) + 1000 / (1+r/2) ^32

R = 9.16%