Avicorp has a $10.3 million debt issue outstanding, with a 6.1% 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 the after-tax cost of debt?