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Bertelsmann Aviation, Inc., is planning to raise a portion of the capital needed for next year's expansion by selling bonds. Each of the bonds has
Bertelsmann Aviation, Inc., is planning to raise a portion of the capital needed for next year's expansion by selling bonds. Each of the bonds has a face value of $1,000, a coupon rate of 5%, and will have an initial maturity of 15 years. The bonds will pay interest twice per year. The firm faces a marginal tax rate of 21%. The bonds will be sold to the investing public at par value. The firm plans to use the services of an investment banking firm which will charge 3% of the market price of the bonds as the underwriting spread. Which of the following is the firm's effective cost of capital on these bonds? Select one: a. 5.29% b. 3.18% C. 4.18% d. 2.12% e. 2.91%
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