# 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 at94 % 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.

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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
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.
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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 6.705%.

Step 3

Excel calculation:

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