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

To calculate the after-tax cost of debt, multiply the before-tax cost of debt by .( (1+T) (1-T))

Fuzzy Button Clothing Company (FBCC) can borrow funds at an interest rate of 9.70% for a period of four years. Its marginal federal-plus-state tax rate is 45%. FBCCs after-tax cost of debt is (rounded to two decimal places). ______

At the present time, Fuzzy Button Clothing Company (FBCC) has a series of ten-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,278.41 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If FBCC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?

3.48%

3.87%

4.45%

3.10%