Problem
Avicorp has a $14.6 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 ?ve years. It is currently priced at 94% of par value.
1) What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return.
2) If Avicorp faces a 40% tax rate, what is its after-tax cost of debt?