2. An overview of a firm's cost of debt

The before-tax cost of debt is the interest rate that a firm pays on any new debt financing.

Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 11.10% for a period of six years. Its marginal federal-plus-state tax rate is 25%. OCPs after-tax cost of debt is (rounded to two decimal places).

At the present time, Omni Consumer Products Company (OCP) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,229.24 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)

3.56%

2.85%

4.09%

4.27%