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. An overview of a firm's cost of debt Thebefore-tax cost of debt is the interest rate that a firm pays on any new debt

. An overview of a firm's cost of debt

Thebefore-tax cost of debt 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 12.50% for a period of four years. Its marginal federal-plus-state tax rate is 25%. OCPs after-tax cost of debt is 9.38% (rounded to two decimal places).

At the present time, Omni Consumer Products Company (OCP) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,438.04 per bond, carry a coupon rate of 14%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. 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)? (Note: Round your YTM rate to two decimal place.)

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