An overview of a firm's cost of debt

The before$-$tax cost of debt grad is the interest rate that a firm pays on any new debt financing.

Green Caterpillar Garden Supplies $($GCGS$)$ can borrow funds at an interest rate of $11\mathrm{.}10\%$ for a period of seven years. Its marginal federal$-$plus$-$state

tax rate is $30\%.$ GCGS$\text{'}$s after$-$tax cost of debt is

$7\mathrm{.}77\%$

$($rounded to two decimal places$).$

At the present time, Green Caterpillar Garden Supplies $($GCGS$)$ has a series of five$-$year noncallable bonds with a face value of $$1,000$ that are

outstanding. These bonds have a current market price of $$1,229\mathrm{.}24$ 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 GCGS wants to issue new debt, what would be a reasonable estimate for its after$-$tax cost

of debt $($rounded to two decimal places$)?$

$3\mathrm{.}82\%$

$3\mathrm{.}32\%$

$3\mathrm{.}98\%$

$2\mathrm{.}66\%$