Calculate the after-tax component cost of capital, kc, for a 7.5 percent convertible debenture sold at par and due to mature in 25 years.
The conversion ratio is 25, and conversion is expected to occur at the end of 10 years, when the common stock price is expected to be $54 a share.
The company has a 40 percent marginal tax rate. Is there any reason for you to believe that this estimate may be biased up or down?