Avicorp has a $11.5 million debt issue outstanding, with a 6.2% 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 94.22% of par value. a. What is Avicorp's pretax cost of debt? 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.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Qq.61.

Subject  :- Finance 

Avicorp has a $11.5 million debt issue outstanding, with a 6.2% 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 94.22% of par value.
a. What is Avicorp's pretax cost of debt?
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.
Transcribed Image Text:Avicorp has a $11.5 million debt issue outstanding, with a 6.2% 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 94.22% of par value. a. What is Avicorp's pretax cost of debt? 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.
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