Avicorp has a $13.7 million debt issue outstanding, with a 5.8% coupon rate. The debt has semi-annual coupons, the next coupon is due in six
Avicorp has a $13.7 million debt issue outstanding, with a 5.8% 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.
(Answer is NOT 7.2521% for a.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To determine both parts of this problem we need to find the yield to maturity YTM for the debt which ...
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Step: 2
Step: 3
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Authors: Holley Ulbrich
1st Edition
0324016603, 978-0324016604
