Choice "D" is correct. The net cost of debt is computed as the effective interest rate net of tax, or 14% × .70.8%. The question is trying to trick the candidate into using the coupon rate of 12% rather than the effective interest rate. The coupon rate is used only if it is the same as the effective interest rate and there are no flotation costs.Choice "c" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% × .70.8%, not the coupon rate of 12% × .70.4%.Choice "b" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% × .70.8%, not the coupon rate of 12% by itself. The cost of debt is computed on an after-tax basis and uses the effective interest rate instead of the coupon rate.Choice "a" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% × .70.8%, not the effective interest rate of 14% by itself. The cost of debt is computed on an after-tax basis.