Bates Corporation is considering four average risk projects with the following costs and rates of return:

Expected

Project Cost Rate of Return

1 $4,000 18%

2 $3,000 16%

3 $7,000 13.75%

4 $2,000 12.50%

The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%.

It can issue preferred stock that pays a constant dividend of $5.00 per year at $40.00 per share.

Also, its common stock currently sells for $32.00 per share; the next expected dividend, D1, is $3.50; and the dividend is expected to grow at a constant rate of 6% per year.

The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

Question #9: What is the after-tax cost of debt?

Group of answer choices

6.5%

7.0%

3%

10%