Problem:
Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 91 percent of face value. The issue makes semiannual payments and has a coupon rate of 7 percent annually.
Required:
Question 1: What is Advance's pretax cost of debt?
Question 2: If the tax rate is 36 percent, what is the aftertax cost of debt?
Note: Please show how you came up with the solution.