Avicorp has a $10.9 million debt issueoutstanding, with a 6.1% coupon rate. The debt hassemi-annual coupons, the next coupon is due in sixmonths, and the debt matures in five years. It is currently priced at 94% of par value.

a. What isAvicorp's pre-tax cost ofdebt? Note: Compute the effective annual return.

b. If Avicorp faces a 40% taxrate, what is itsafter-tax cost ofdebt?

Note: Assume that the firm will always be able to utilize its full interest tax shield.