the new project.

Consider the case of Purple Lemon Fruit Company $($Purple Lemon$)$:

Purple Lemon Fruit Company is considering issuing a new $25-$year debt issue that would pay an annual coupon payment of $$90.$ Each bond in the issue would carry a $$1,000$ par value and would be expected to be sold for a price equal to its par value.

Purple Lemon's CFO has pointed out that the firm would incur a flotation cost of $2\%$ when initially issuing the bond issue. Remember, the flotation costs will be the proceeds the firm will receive after issuing its new bonds. The firm's marginal federal$-$plus$-$state tax rate is $35\%.$

To see the effect of flotation costs on Purple Lemon's after$-$tax cost of debt $($generic$),$ calculate the after$-$tax cost of the firm's debt issue with and without its flotation costs, and select the correct after$-$tax costs $($in percentage form$)$:

After$-$tax cost of debt without flotation cost:

After$-$tax cost of debt with flotation cost:

This is the cost of debt, and it is different from the average cost of capital raised in the past.