The Ritz Carlson would like to calculate its cost of debt.

It sells annual-coupon paying bonds with 9 year maturity, $1,000 par value, and 12% coupon rate for a price of $1,045.

The Ritz Carlson must pay 5.5% of par value in flotation costs and it has a tax rate of 35%.

a. Calculate the cost of debt for a 35% tax rate. Keep 2 decimal places for percentages for full credit (0.00% or 0.0000).

b. What would happen to The Ritz Carlsons cost of debt if the tax rate increases to 40%? Keep 2 decimal places for percentages for full credit (0.00% or 0.0000).

c. What can we conclude about the relationship between cost of debt and the tax rate? What explains this relationship?