What do lenders require, and what kind of debt costs the company? The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt that is to be raised to finance the new project. Consider the case of Happy Lion Manufacturing Inc.: Happy Lion Manufacturing Inc. can issue a 30-year debt security that pays an annual coupon payment of $85. The bond carries a par value of $1,000 and is currently trading at par. Based on this information, determine the after-tax cost of Happy Lions debt if the firms marginal federal-plus-state tax rate is 40%. Happy Lion Manufacturing Inc.s after-tax cost of debt (rounded to four decimal places) is:

5.6100%

5.3550%

5.1000%

4.8450%