Question

Avicorp has a $ 11.8 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 93 % of par value.

a. What is​ Avicorp's pre-tax cost of​ debt? Note: Compute the effective annual return. (Round to 4 decimal places)

b. If Avicorp faces a 40 % tax​ rate, what is its​ after-tax cost of​ debt? (Round to 4 decimal places)

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

Answer 1

	A	Par value of debt	$11,800,000
	Pv=A*93%	Current Market Value	$10,974,000
	Pmt=A*(5.9%/2)	Semi annual Coupon payment	$348,100
	Nper	Number of coupns to be paid till maturity	10	(5*2)
	Fv	Payment at maturity	$11,800,000
	RATE	Semi annual yield to maturity	3.8047%	(Using RATE function of exel with Nper=10,Pmt=348100,Pv=-10974000,Fv=11800000)
			0.038047
		Effective Annual Return =R
		1+R=(1+0.038047)^2
		Effective Annual Return =R=(1.038047^2)-1	0.077541
	a	Pre tax Cost of Debt=0.077541=	7.7541%
	b	Tax Rate =40%	0.4
		After Tax Cost of Debt =7.7541%*(1-Tax Rate)	4.6525%