I have included an example calculation below

a. Pre tax cost of debt = 6.2402% is not the correct answer

b. After tax cost of debt = 3.7441% is not the correct answer

EXAMPLE

Avicorp has a $11.5 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.) + Avicorp has a $13.2 million debt issue outstanding, with a 6.2% coupon rate. The debt has semiannual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 93% of par value. a. What is Avicorp's 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. What is Avicorp's cost of debt? Note: Compute the effective annual return. The cost of debt is the yield-to-maturity (YTM) on the outstanding debt issue. We solve for the 6-month YTM on the bond: $31.00 $31.00 $31.00 $31.00 + $1,000 $930 = (1 + YTM) (1 + YTM2 (1 + YTM) (1 + YTM)10 Therefore, YTM = 3.9614% Then, compute the effective annual return (EAR) as: EAR= (1 +0.039614)2 1 = 0.080797 = 8.0797% The cost of debt is 3.9614% every 6 months, or 8.0797% per year. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? The after-tax cost of debt is computed as: After-tax Cost of Debt= EAR*(1-TC) where Tc is Avicorp's tax rate. Then, After-tax Cost of Debt = 0.080797 X(1 -0.4) = 0.048478 = 4.8478% If Avicorp faces a 40% tax rate, the after-tax cost of debt is 4.8478%. Question is complete