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%

---

Definitions:

Alpha Waves

These are brain waves detected by electroencephalography (EEG), typically indicating a state of wakeful relaxation.

Oval Window

A membrane-covered opening at the base of the stapes bone in the middle ear that transfers sound vibrations to the cochlea.

Basilar Membrane

A membrane in the cochlea of the inner ear that vibrates in response to sound and whose vibrations lead to activity in the auditory pathways of the brain.

Middle Ear

The part of the ear between the eardrum and the oval window that contains three small bones which transmit sound vibrations.