Question

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

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.

a. The cost of debt is

nothing​%

per year.  ​(Round to four decimal​ places.)b. If Avicorp faces a

40%

tax​ rate, the​ after-tax cost of debt is

nothing​%

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =5x2

960 =∑ [(5.9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^5x2

k=1

YTM% = 6.86 = pre tax cost of debt

Using Calculator: press buttons "2ND"+"FV" then assign

PV =-960

PMT = Par value * coupon %/coupons per year=1000*5.9/(2*100)

N =5*2

FV =1000

CPT I/Y

Interest rate = I/Y*2

Using Excel

=RATE(nper,pmt,pv,fv,type,guess)*no. of payments per year

=RATE(2*5,-5.9*1000/(2*100),960,-1000,,)*2

After tax rate = YTM * (1-Tax rate)

After tax rate = 6.86 * (1-0.4)

After tax rate = 4.12