Avicorp has a $11.4 million debt issue outstanding, with a 6.2% coupon rate. The

Question

Avicorp has a $11.4 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 95%of par value. a. What is Avicorp's pre-tax cost of debt? b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? a. The pre-tax cost of debt is % per year. (Round to four decimal places.) b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is %. (Round to four decimal places.)

Explanation / Answer

Solution:

A. pre-tax cost of debt = r

Coupon payment = 6.2%*11.4/2 million= 0.3534 million

95%*11.4 = 0.3534*(1-/(1+r)^10)/r + 11.4/(1+r)^10

pre-tax cost of debt, r= 4.56%

B. after-tax cost of debt= 4.56%*(1-40%)=2.73%

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