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 to be raised to finance the new project. Consider the case of Purple Lemon Shipbuilders Inc. (Purple Lemon): Purple Lemon Shipbuildern Inc is considering issuing a new 20 -year debt issue that would pay an annual coupon payment of 590 . 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 wh wen incially issulng the bond isfue, Remamber, the flotation costs will be the proceeds the firm will receive after issuing ita new bonds. The firm's marginal federal-plus-state tax rate is 4566 . To see the effect of flotation costs on Purple Lemon's after-tax cost of debt (genens), calculate the aftertax cort of the firm's debt issue with and. without its flotation costs; and select the correct after-tax costs (in percentage form): This is the cort of debt, and it is different from the average coss of capital raised in the part