AJ Corporation's target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 35 percent. Which of the following is AJ's after-tax cost of debt? (Round off the answer to one decimal place.)

a. 5.3%

b. 7.8%

c. 6.8%

d. 9.5%

e. 7%