Gargoyle Unlimited is planning to issue a zero-coupon bond to fund a project that will yield its first positive cash flow in three years. That cash flow will be sufficient to pay off the entire debt issue. The bond's par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25. The firm's marginal tax rate is 40 percent. Refer to Gargoyle Unlimited. What is the expected after-tax cost of this debt issue? Group of answer choices 6.10% 6.72% 11.20% 4.00% 4.48%

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 8P
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Gargoyle Unlimited is planning to issue a zero-coupon bond to fund a project that will yield its first positive cash flow in three years. That cash flow will be sufficient to pay off the entire debt issue. The bond's par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25. The firm's marginal tax rate is 40 percent.
Refer to Gargoyle Unlimited. What is the expected after-tax cost of this debt issue?
Group of answer choices
6.10%
6.72%
11.20%
4.00%
4.48%
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