Avicorp has a $ 10.2 million debt issue outstanding, with a 5.8 % 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. a. The cost of debt is % per year. (Round to four decimal places.)b. If Avicorp faces a40 % tax rate, the after-tax cost of debt is %. (Round to four decimal places.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Avicorp has a $ 10.2 million debt issue outstanding, with a 5.8 % 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. a. The cost of debt is % per year. (Round to four decimal
places.)b. If Avicorp faces a40 % tax rate, the after-tax cost of debt is %. (Round to four decimal places.)
Transcribed Image Text:Avicorp has a $ 10.2 million debt issue outstanding, with a 5.8 % 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. a. The cost of debt is % per year. (Round to four decimal places.)b. If Avicorp faces a40 % tax rate, the after-tax cost of debt is %. (Round to four decimal places.)
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