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Part 1

Use the following information to answer the question(s) below.

Luther Industries has 25 million shares outstanding trading at $18 per share. In addition, Luther has $150 million in outstanding debt. Suppose Luther's equity cost of capital is 13%, its debt cost of capital is 7%, and the corporate tax rate is 21%.

Luther's

aftertax

debt cost of capital is closest to:

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Part 1

A.

9.8%.

B.

4.2%.

C.

5.5%.

D.

7.0%.