Exhibit 7A.1 Gargoyle Unlimited Is Planning to Issue a Zero Coupon Bond

question 10

Multiple Choice

Exhibit 7A.1
Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in 3 years. That cash flow will be sufficient to pay off the entire debt issue. The bond's par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25. The firm's marginal tax rate is 40%.
-Refer to Exhibit 7A.1.What is the expected after-tax cost of this debt issue?

• A)5.76%
• B)6.06%
• C)6.38%
• D)6.72%
• E)7.06%

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