Question

Avicorp has a

$ 13.2

million debt issue​ outstanding, with a

6.2 %

coupon rate. The debt has​ semi-annual coupons, the next coupon is due in six​ months, and the debt matures in five years. It is currently priced at

94 %

of par value.

a. What is​ Avicorp's pre-tax cost of​ debt? Note: Compute the effective annual return.

b. If Avicorp faces a

40 %

tax​ rate, what is its​ after-tax cost of​ debt?

​Note: Assume that the firm will always be able to utilize its full interest tax shield.

Answer 1

Calculation is shown below

Working is shown below