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

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

Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 12.50% for a period of seven years. Its marginal federal-plus-state tax rate is 30%. PRCs after-tax cost of debt is (rounded to two decimal places).

At the present time, Perpetualcold Refrigeration Company (PRC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,050.76 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 30%. If PRC 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.)

6.09%

4.87%

5.48%

7.31%