Drogo, inc is trying to determine its cost of debt. the firm has a debt issue outstanding with 20 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 10% annually.

what is the company's pretax cost of debt?

if the tax rate is 35% what is the after tax cost of debt?

explanation:

the pretax cost of debt is the YTM of the companys bonds so:

P0=1080=50(PVIFAr%, 40)+ 1000(PVIFr%,40) =4.561% YTM=24.561=9.12

and after tax cost of debt is RD=.0912(1-.35)

RD=.0593 or 5.93%

can you please explain how the highlighted answer came to be? i do not understand the (1080=50(PVIFr%, 40) I do not know what that is or how to get that answer can you please break this down step by step? I have no idea how to get YTM and PVIFr% is that replaced by (1-.40)? i tried that but did not get the correct answer can you please break this down for me? step by step into more details...