Pre-Tax Cost of Debt Assignment | Homework For You

Avicorp has a $10.2 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 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? Note: Assume that the firm will always be able to utilize its full interest tax shield.
a. The cost of debt is 6.8585 % per year. (Round to four decimal places.)
b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is 4.1151 %. (Round to four decimal places.) Get Finance homework help today