Avicorp has a $15.5 million debt issue outstanding, with a 6.3% 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 92% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. (Another note: The pre-tax cost of debt is the yield to maturity (YTM) on the outstanding debt issue. We solve for the 6-month YTM on the bond: (This is what I have so far... not sure how they got $920 here:) ** $920 = (31.50/(1+YTM)) + (31.50/(1+YTM)^2)) + (31.50/(1+YTM)^9)) + (31.50 + 1,000)/(1+YTM)^10) Therefore, YTM = 4.1434% Then compute the effective annual return (EAR) as: EAR = (1 + 0.041434)^2 -1 = 0.084585 The pre-tax cost of debt is 4.1434% every 6 months, or 8.4585% per year. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? After-tax cost of debt = EAR x (1-TC) where Tc is Avicorp's tax rate. Then, After- tax cost of debt = 0.084585 x (1-0.4) = 0.050751 If Avicorps faces a 40% tax rate, the after-tax cost of debt is 5.0751%