Avicorp has a $ 12.4 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 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. Get Finance homework help today