An overview of a firm's cost of debt

The

is the interest rate that a firm pays on any new debt financing.

Omni Consumer Products Company $($OCP$)$ can borrow funds at an interest rate of $12\mathrm{.}50\%$ for a period of six years. Its marginal federal$-$plus$-$state tax

rate is $40\%.$ OCP's after$-$tax cost of debt is

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

At the present time, Omni Consumer Products Company $($OCP$)$ has $20-$year noncallable bonds with a face value of $$1,000$ that are outstanding. These

bonds have a current market price of $$1,382\mathrm{.}73$ per bond, carry a coupon rate of $13\%,$ and distribute annual coupon payments. The company incurs a

federal$-$plus$-$state tax rate of $40\%.$ If OCP wants to issue new debt, what would be a reasonable estimate for its after$-$tax cost of debt $($rounded to two

decimal places$)?$

$6\mathrm{.}11\%$

$6\mathrm{.}37\%$

$5\mathrm{.}31\%$

$4\mathrm{.}25\%$