(The following information applies to questions 1 through 6.) Consider Rhye, amid-size pharmaceutical company. Rhyes equity has a book value of $2.8 billion and a market value of $19.4 billion. Rhyes debt, on the other hand, has a book value of $500 million and a market value of $600 million; the debts annual interest rate and yield to maturity are 6% and 5%, respectively. Currently, Rhye has a beta of 1.2 and faces a corporate tax rate of 35%. Also currently, the yield to maturity on 10-year U.S. Treasury Notes is 2.5%. The market risk premium remains around its historical average of 5.5%.

What is Rhyes after-tax required return on debt, or after-tax cost of debt?

a) 6.25%

b) 3.25%

c) 4.50%

d) 5.75%

e) 7.50%