Avicorp has a $11.1 million debt issue outstanding, with a 6.1% 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.
Price 94
Coupon 3.05 (6.1/2 per period)
Period 10
Par value 100
a) Yield 7.56% RATE(10,3.05,-94,100,,)*2
Cost of debt (pre tax) 7.56%
b) After tax cost of debt 4.54% 7.56%*(1-40%)
Avicorp has a $11.1 million debt issue outstanding, with a 6.1% coupon rate. The debt has...
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