Gibson Industries is issuing a $1,000 par value bond with an 8% annual coupon rate and that matures in 20 years. Coupon interests are paid twice a year. Investors are willing to pay $950 per share for these bonds. Gibson is in the 30% tax bracket.

1.What is the rate of return expected by the bond investor?

2.What will be the after-tax cost of debt of the bond?

3.How would your answer to part a) and part b) change, if the investment banker who underwrites the bond issuance charge Gibson a broker fee of 7 cents for every dollar outside investors paid on the bond?