Problem: Avicorp has a $ 10.9 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.