Gargoyle Unlimited Gargoyle Unlimited Is Planning to Issue a Zero Coupon Bond

question 40

Multiple Choice

Gargoyle Unlimited
Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in three 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 percent.
-Refer to Gargoyle Unlimited.What is the expected after-tax cost of this debt issue?

• A) 11.20%
• B) 4.48%
• C) 6.72%
• D) 6.10%
• E) 4.00%

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Definitions:

Degrees Of Freedom

The number of independent values or quantities which can be assigned to a statistical distribution or calculation.

Null Hypothesis

A hypothesis stating there is no significant difference or effect, serving as the default assumption in hypothesis testing.

T Test

A statistical test used to compare the means of two groups to see if there is a significant difference between them, often used when dealing with small sample sizes.

Research Hypothesis

A speculative statement about the relationship between two or more variables that is tested through research.