Suppose that Smith Company is considering a new project. They are trying to determine the required rate of return for their debt and equity holders. See the information below:

• A 7.5% percent annual coupon bond with 20 years to maturity, selling for 104 percent of par. The bonds make semiannual payments. What is the before tax cost of debt? If the tax rate is 40%, what is the after-tax cost of debt?