Tortuga is looking to expand. The firm has a $50 million revolving line of credit and currently has $10 million drawn at an interest rate of 3-month Libor plus 250 basis points. The remainder credit line can be assumed to have no fees associated with it. The outlook for the most recent 3-month U.S. dollar Libor rate is 2.50%.

Long-term financing is also in place in two forms. After several years of revenue and earnings growth, Tortuga issued one million shares of common stock at an issue price of $10 per share. The firm used this $10 million in funding to increase production lines and build a global presence by opening an additional manufacturing facility in Panama. The current price of Tortuga shares is $21. Two years ago, Tortuga issued a seven-year bond for $5.0 million face value. Each $1,000 par bond carries a coupon of 9.75%. The bond pays interest semi-annually and is currently trading in the market at 103.25 as a percent of par. The company has a 25% corporate tax rate.

The firm calculates its required return on equity with the Capital Asset Pricing Model (CAPM) using a 4.0% historical Treasury rate for the risk-free rate and 6.0% as the historical market risk premium. Tortugas beta is 1.45.

Analyzing the companys bond, what is the yield to maturity on the bond issue, rd (cost of debt)?

6.97%

6.43%

7.95%

8.93%