The Heuser companys currently outstanding 10% coupon bonds have a yield to maturity of 12%. Heuser believes it could issue at par new bonds that would provide a similar yield maturity. The marginal tax rate of Heuse is 35%.

Required:

1. Calculate the after-tax cost of debt of Heuser.

2. Why debt is generally considered cheaper than equity? Explain in less than 6 lines.

3. Would you borrow money if interest rate is significantly lower than ROA? (Either state yes or no). Explain in less than 6 lines.

4. Would you borrow money if interest rate is significantly less than ROE? (Either state yes or no). Explain in less than 6 lines.