Answer (C) is correct . Annual cash interest is $4,500,000 {[$48,000,000 ÷ (1.0 – .04 flotation cost)] × .09}. The cost of the new bonds equals the annual cash interest divided by the net issue proceeds, times one minus the tax rate, or 5.63% [($4,500,000 ÷ $48,000,000) × (100% – 40%)].
Answer (A) is incorrect because This percentage (5.13%) is 5.40% reduced by the 5% stock flotation costs.
Answer (B) is incorrect because This percentage (5.40%) is 60% of 9%.
Answer (D) is incorrect because This percentage (6.60%) is the market interest rate times one minus the tax rate.
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The after-tax weighted marginal cost of capital for Rogers’ second financing alternative consisting solely of bonds would be
