Question

Avicorp has a $12.9 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 95% 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.

Answer 1

5.90% COUPON RATE YEARS TO MATURITY 5 10 (years to maturity x 2) NPER 29.5 (face value x coupon rate)/2 PMT $1,000.00 FACE VALUE $950.00 PRICE PV 3.553% RATE rate(nper,pmt,-pv,fv) rate(10,29.5,-950,1000) 7.11% YIELD RATE X 2 = [3.553%*2) 7.23% [(1+7.11%/2)^2 - 1 ] Equivalent annual YTM Pretax cost of debt

after tax cost of debt 4,34% 7.23% 0.6]