3. The cost of debt Aa Aa What do lenders require, and what kind of debt costs the company? The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt that is to be raised to finance the new project. Consider the case of Purple Lemon Shipbuilders Inc. Purple Lemon Shipbuilders Inc. can issue a 15-year debt security that pays an annual coupon payment of $85. The bond carries a par value of $1,000 and is currently trading at par. Based on this information, determine the after-tax cost of Purple Lemon's debt if the firm's marginal federal-plus-state tax rate is 40% Purple Lemon Shipbuilders Inc.'s after-tax cost of debt (rounded to four decimal places) is: 5.6100% 0 5.1000% 5.3550% O 4.845096 Purple Lemon's CFO has pointed out that if these new bonds are issued, the company will incur a flotation cost of 1%. Remember, these flotation costs will be new bonds. Calculate the company's after-tax cost of debt net of the issue's flotation costs. from the proceeds the firm receives from the sale of its If Purple Lemon issues its new bonds and incurs flotation costs of 1%, then its adjusted (net) after-tax cost of debt (rounded to four decimal places) will be: 0 4.8450% 0 5.1728% 0 5.6100% 4.5900% This is the cost of debt, and it is different from the average cost of capital raised in the past