Before-tax Cost of Debt

Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. Calculate the before-tax cost of financing with the following alternative.

coupon rate: 7%

time to Maturity: 19 years

premium or discount: -$170

The before-tax cost of debt is ____%. (Round to two decimal places.)

\begin{tabular}{ccc} \hline Coupon rate & Time to maturity & Premium or discount \\ \hline 7% & 19 years & $170 \\ \hline \end{tabular}