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Avicorp has a $11.7 million debt issue outstanding, with a 6.2% coupon rate. The debt...

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Finance

Avicorp has a $11.7 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 93% 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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