Question

Avicorp has a $14.3 million debt issue outstanding, with a 5.9% 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 93% 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. a. The cost of debt is % per year. (Round to four decimal places.)

Please Answer A and B, round to 4 decimal places

Answer 1

Nper Pmt 5*2 10 1000*0.059*1/2 $ 29.50 (930.00) Pv $ 1000*93% Fv 1,000.00 type RATE(nper,pmt,pv,fv,type) Rate RATE(10,29.5,-930, 1000, 1) 3.9257% Cost of Debt (1+0.039257)A2-1 Cost of Debt 8.0055% a Pretax cost of debt*(1-Tax rate) b After Tax Cost of Debt 0.08055*(1-0.4) 4.8033% 4.8033%