Suppose a company will issue new 15-year debt with a par value of $1,000 and a coupon rate of 8%, paid annually. The issue price will be $1,000. The tax rate is 40%.
a. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt?
b. What if the flotation costs were 10% of the bond issue?
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