Avicorp has a $14.2 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 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.
a. The cost of debt is
nothing%
per year. (Round to four decimal places.)b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is
nothing%.
(Round to four decimal places.)
a
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =5x2 |
940 =∑ [(5.9*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^5x2 |
k=1 |
YTM% = 7.3559 |
b
After tax rate = YTM * (1-Tax rate) |
After tax rate = 7.3559 * (1-0.4) |
After tax rate = 4.4135 |
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