Avicorp has a $14.9 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 96% 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.

Question:

a. The cost of debt is ____% per year.(Round to four decimal places.)