The Cost of Capital: Cost of Debt

A firm's before-tax cost of debt, r_d, is the interest rate that the firm must pay on (Select: Outstanding, Secured, New) debt. Because interest is tax deductible, the relevant cost of (Select: Outstanding, Secured, New) debt used to calculate a firm's WACC is the (Select: after-tax, before-tax) cost of debt, r_d (1 T). The (Select: after-tax, before-tax) cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price depends on (Select: after-tax, before-tax) cash flows. It is important to emphasize that the cost of debt is the interest rate on (Select: outstanding, new) debt, not (Select: outstanding, new) debt because our primary concern with the cost of capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is (Select: relevant, irrelevant) because we need to know the cost of (Select: outstanding, new, secure) capital. For these reasons, the (Select: current yield rate, yield to maturity, coupon rate) on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the (Select: current yield rate, yield to maturity, coupon rate). (Select: current yield rate, yield to maturity, coupon rate) on the company's (Select: long, short) -term debt is generally used to calculate the cost of debt because more often than not, the capital is being raised to fund (Select: long, short) projects.

Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,400 face value and a 5% coupon, semiannual payment ($35 payment every 6 months). The bonds currently sell for $845.87. If the firm's marginal tax rate is 40%, what is the firm's after-tax cost of debt? Round your answer to 2 decimal places. Do not round intermediate calculations. __________%