Question

Avicorp has a $ 14.2 million debt issue? outstanding, with a 5.8% 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 96% 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?

Answer 1

	r =	5.8/2 =	2.90%
	n =	5 x 2 =	10
	Face value =		1000
	Price =	1000 x 96% =	960
	Coupon =	1000 x r =	29
	YTM is the rate at which PV of cash flows =			Price
	960	=	29 x PVAF(YTM,n) + 1000 x PVIF(YTM,n)
	YTM		Price
	3.00%		991.47
	YTM		960
	4.00%		910.78
	Using linear Intrpolation -
	YTM - 3/4-3 =		960-991.47/(910.78-991.47)
	YTM - 3/4-3 =		-31.47/-80.69
	YTM - 3 =		0.3900
	YTM =		3.3900	Semi annual
			Approx
		Or	3.39 x 2
			6.780021
	Pre tax cost of debt =			6.7800
	Post tax cost of debt =		6.78 x (1-40%) =	4.0680