Drogo, 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 105 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually.
1) What is the company’s pretax cost of debt?
2) If the tax rate is 35 percent, what is the aftertax cost of debt?