Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in 3 years. That cash flow will be sufficient to pay off the entire debt issue. The bond's par value will be $1,000, it will mature in 3 years, and it will sell in the market for $785. The firm's marginal tax rate is 40.00%. What is the expected after-tax cost of this debt issue? Do not round your intermediate calculations.

a. 5.04%

b. 7.72%

c. 5.48%

d. 3.74%

e. 3.36%