The Richardson Oil Company is considering issuing additional debt. They wish to use the yield on their existing debt as a guide to the cost of new debt. They currently have a zero-coupon bond outstanding that has five years to maturity and a current market price of 74⁶
₈, or $747.50 per $1,000 par value.

a. If Richardson’s marginal tax rate is 20%, what is the cost of debt?

b. If Richardson’s marginal tax rate is 30%, what is the cost of debt?