Premium Pet Care Co. has 12-year, annual coupon bonds outstanding with an 8.5 percent coupon. The face value of each bond is $1,000. These bonds are currently selling for 103.8 percent of face value. What is the companys pre-tax cost of debt?

1. 5.50 percent
2. 6.00 percent
3. 6.75 percent
4. 7.25 percent
5. 8.00 percent