Question

OLUTE. U Opis 5 of 13 (10 complete HW Score: 68 13% 27 25 of 40 pts P 13-6 (similar to Question Avicorp has $115 million debt issue outstanding with 615 coupon rate. The debt hos semanal coupons, the meant coupon is dus in six months and the debt matures in five years. It is currently priced at of pe value a. What is Alcorp's pre-tax cost of debt? Note Compute the effective annual retum b. Avicarp faces a 40 tax rate, what is is wher-tax cost of debt? Note Assume that the form will always be able to traits full wrest tax shield 2. The cost of debt is per you (Round to four decimal places) Enter your answer in the answer box and then click Check Answer pan remaining Clear A Type here to search e a 307 AM MO
need a and b please

Answer 1

The yield to maturity(YTM) is the annual return from an investment purchased today and held till maturity, i.e., it is the rate at which the current market price of the bond is equal to the present value of all the cash flows from the bond. It is equal to cost of debt.

Let par value be $100

Coupon rate = 6.1%

Time to maturity(t) = 5 years

No of periods = 5 * 2 = 10

Coupon payment = 6.1% of 100 / 2 = $3.05

Present value(PV) = $96 (96% of par)

Ytm/cost of debt =?

Using a financial calculator we get ytm as = 3.53%

Using excel,

Present Value	96
pmt	3.05
no periods	10
Future Value	100
YTM	3.53%	(=Rate(10,3.05,-96,100,0)

Ytm(semi annual) = 3.53

Ytm annual = 3.53 * 2 = 7.06%

a) Hence cost of debt = 7.0635%

b) After-tax cost of debt = Cost of debt * (1 - Tax rate)

Tax rate = 40%

After tax cost of debt = 7.06 * (1 - 0.40) = 4.236%

Hence after tax cost of debt is 4.236%.

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