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 $1000, it will mature in 3 years, and it will sell in the market for $785.00. The firm's marginal tax rate is 40.00%. Refer to Exhibit 7A.1. What is the expected after-tax cost of this debt issue? Do not round your intermediate calculations.
A. 5.55%
B. 4.89%
C. 6.20%
D. 5.04%
E. 5.09%
Answer: D
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