(The following information and Exhibit 1 apply to questions 1 through 4.) Consider the two companies below, Bull and Bear, which are identical in terms of revenue and costs, and hence identical in terms of EBIT (earnings before interest and taxes). They are also identical in terms of the corporate tax rate they face, which is 35%.Bull has no debt. Bear, on the other hand, has $400 million of debt, on which it pays an annual interest rate of 6%. Exhibit 1 (In Millions of $) BullBear Bull Bear Revenue $500.0 $500.0 Costs $250.0 $250.0 EBIT $250.0 $250.0 Interest Earnings Before Taxes Corporate Tax Net Income

Question 4

Assuming that the required return on Bears debt is currently equal to its interest rate of 6%, what is this companys after-tax cost of debt?

a) 3.9%

b) 11.0%

c) 7.2%

d) 9.5%

e) 5.1%