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 margina/ cost of the new debt to be raised to finance the new project. Consider the case of Purple Lemon Fruit Company (Purple Lemon): Purple Lemon Fruit Company is considering issuing a new 30-year debt issue that would pay an annual coupon payment of \$80. 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 3% when initially issuing the bond issue. Remember, the flotation costs will be the proceeds the firm will receive after issuing its new bonds. The firm's marginal federal-plus-state tax rate is 35%. To see the effect of flotation costs on Purple Lemon's after-tax cost of debt (generic), calculate the after-tax cost of the firm's debt issue with and without its flotation costs, and select the correct after-tax costs (in percentage form): After-tax cost of debt without flotation cost: After-tax cost of debt with flotation cost: This is the cost of debt, and it is different from the average cost of capital raised in the past