Avicorp has a

$14.4

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

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.

a. The cost of debt is

nothing%

per year.