a. The cost of debt is % per year. (Round to four decimal places.) b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is %. (Round to four decimal places.)
a. The cost of debt is % per year. (Round to four decimal places.) b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is %. (Round to four decimal places.)
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
Section: Chapter Questions
Problem 1PS
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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
% per year. (Round to four decimal places.)
b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is
%. (Round to four decimal places.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1a229b23-cd73-40ed-bbb5-5d6ddeb67c97%2Fd21b7b1f-a58e-4117-bbb4-4e23bd630a56%2Fh27vssm_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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
% per year. (Round to four decimal places.)
b. If Avicorp faces a 40% tax rate, the after-tax cost of debt is
%. (Round to four decimal places.)
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