Cold Duck Brewing Company is considering issuing a new 20-year debt issue that would pay an annual coupon payment of $70. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a price equal to its par value.

Cold Duck's CFO has pointed out that the firm would incur a flotation cost of 1% when initially issuing the bond issue. Remember, the flotation costs will besubtracted from the proceeds the firm will receive after issuing its new bonds. The firm's marginal federal-plus-state tax rate is 45%.

To see the effect of flotation costs on Cold Duck's after-tax cost of debt (generic), calculate the after-tax cost of the firm's debt issue with and without its flotation costs, and select the correct after-tax costs (in percentage form):

After-tax cost of debt without flotation cost:
After-tax cost of debt with flotation cost: