A corporate bond has a face value of $1000 and a coupon rate of 9%. The bond matures in 14 years and has a current market price of $946. If the corporation sells more bonds it will incur flotation costs of $26 per bond.
Required:
If the corporate tax is 35% what is the after tax cost of debt capital?
A. 8.18%
B. 6.56%
C. 7.31%
D. 5.57%
Note: Please provide reasons to support your answer.