ControlConsider the case of Happy Lion Manufacturing Inc. $($Happy Lion$)$:

Happy Lion Manufacturing Inc. is considering issuing a new $15-$year debt issue that would pay an annual coupon payment of $$85.$ Each bond in the issue would carry a $$1,000$ par value and would be expected to be sold for a price equal to its par value.

Happy Lion$$s CFO has pointed out that the firm would incur a flotation cost of $1\%$ when initially issuing the bond issue. Remember, the flotation costs will be the proceeds the firm will receive after issuing its new bonds. The firm$$s marginal federal$-$plus$-$state tax rate is $40\%.$

To see the effect of flotation costs on Happy Lion$$s after$-$tax cost of debt $($generic$),$ calculate the after$-$tax cost of the firm$$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:

This is the cost of debt, and it is different from the average cost of capital raised in the past.