Avicorp has a $12.9 million debt issue outstanding, with a 5.9% coupon rate. The

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 93% of par value.

(a) What is Avicorp's pretax cost of debt? Note: Compute the effective annual return ( round answer to 4 decimal places)

(b) If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? ( Round answer to 4 decimal places)

PLEASE SHOW WORK AND CLEARLY STATE ANSWERS IN BOLD

Explanation / Answer

Bond Par Value    12,900,000 Bond Market Price@93% of face value    11,997,000 Years To maturity                 5.00 Annual Interest @5.9%=          761,100 YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3 YTM =[761100+(12900000-11997000)/5]/(12900000+2*11997000)/3 YTM= 7.33% a So Pre Tax Cost Of Debt =7.64% b Tax Rate =40% Post Tax cost of debt= 7.33%*(1-40%)= 4.58% So Post Tax cost of Debt = 4.58%

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