Question

Asked Dec 5, 2019

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Avicorp has a $13.6 million debt issue outstanding, with a 6.2 %

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

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.

Step 1

a.

**Computation of the pre-tax cost of debt:**

Step 2

Hence, the pre-tax cost of debt for 6 months is ** 3.298%**, and the effective annual return is

Step 3

**Excel calculation:**

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