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RED Inc. is evaluating a project that will increase annual sales by $175,000 and annual cash...

RED Inc. is evaluating a project that will increase annual sales by $175,000 and annual cash costs by $98,000. The project will initially require $130,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. RED, Inc. is looking at raising additional capital for a future project. For RED, Inc. to determine whether this project is worth investing in, it must first determine the cost of the capital it will use to finance the project.

Q: The firm is looking at issuing a new 30-year bond that pays an annual coupon of 8%. The bond is expected to sell at $980. What is the after-tax cost of debt?

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