Final answer:
The pre-tax cost of debt for Avicorp is 13.292% and the after-tax cost of debt is 7.9752%.
Step-by-step explanation:
The pre-tax cost of debt for Avicorp can be calculated by considering the yield to maturity. The bond is currently priced at 93% of par value, which means it is selling at a discount. To calculate the pre-tax cost of debt, we can find the yield to maturity by considering the future cash flows from the bond. The coupon rate is 5.8%, and the bond matures in five years. Since the coupons are paid semi-annually, there will be ten coupon payments in total. The bond will also repay the principal at maturity.
To calculate the yield to maturity, we can use a financial calculator or a spreadsheet function like Excel's 'YIELD' function. By plugging in the appropriate values, we can find that the yield to maturity is 6.646% per semi-annual period. To convert this to an annual rate, we can multiply it by 2, resulting in an effective annual return of 13.292%. Therefore, the pre-tax cost of debt for Avicorp is 13.292%.
In order to find the after-tax cost of debt, we need to consider the tax shield from the interest payments. Avicorp faces a 40% tax rate, so it can deduct the interest payments from its taxable income. This tax shield reduces the after-tax cost of debt. The after-tax cost of debt is calculated by multiplying the pre-tax cost of debt by one minus the tax rate:
After-tax cost of debt = (1 - Tax rate) * Pre-tax cost of debt
After substituting the values, we find that the after-tax cost of debt for Avicorp is 7.9752%, or approximately 8%.