Avicorp has a $10.5 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.
rate positively ..
Ans a) | we have to use financial calculator to solve this | ||||
put in calculator | |||||
FV | 10500000 | ||||
PV | -9870000 | ||||
PMT | 309750 | ||||
N | 5*2 | 10 | |||
compute I | 3.68% | ||||
Effective annual rate = | (1+3.68%)^2-1 | ||||
7.50% | |||||
Ans b) | After tax cost of debt = 7.5%*(1-40%) | ||||
4.50% | |||||
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