What do lenders require, and what kind of debt costs the company? The cost of debt relevant when companies are evaluating new investments is the marginal cost of new debt to be raised to finance the new project. Consider the case of Nunavut Industries Inc. Nunavut Industries Inc. is considering issuing a new 15-year debt issue that would pay an annual coupon payment of $85. Each bond in the issue will have a face value of $1,000 and is expected to be sold at par. Nunavut Industries Inc.'s CFO has pointed out that the firm would incur a flotation cost of 1% when initially issuing the bond issue. Remember that the flotation costs will be from the amount the firm will receive from issuing its new bonds. The firm's combined marginal corporate tax rate is 40%. To see the effect of flotation costs on the after-tax cost of debt, calculate the after-tax cost of the firm's debt issue with and without flotation costs. Then select the correct after-tax costs in the following boxes After-tax cost of debt without flotation cost: 4.5900% After-tax cost of debt with flotation cost: 5.6100% 5.3550% 5.1000%