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

The __________ 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 10.20% for a period of eight years. Its marginal federal-plus-state tax rate is 45%. OCPs after-tax cost of debt is ___________ (rounded to two decimal places).

At the present time, Omni Consumer Products Company (OCP) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. 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.)

1.73%

2.48%

2.16%

1.94%