If a corporation has an average tax rate of 40 percent, the approximate, annual, after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at $950 is ________.

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The after-tax cost of debt can be calculated using the formula: After-tax cost of debt = Interest rate * (1 - Tax rate). However, for a bond selling at a discount (like this one, which has a face value of $1,000 but is selling for $950), we also need to account for the yield to maturity (YTM), which includes both the annual interest payments and the amortization of the bond's discount over its life. The annual interest payment is 12% of $1,000 = $120. The bond's discount is $1,000 - $950 = $50, which is amortized over 15 years, adding approximately $3.33 ($50/15) to the annual interest payment for a total of $123.33. The approximate YTM before taxes can be calculated using a financial calculator or bond yield formula, but it's roughly higher than the coupon rate because the bond is purchased at a discount. For simplicity, let's assume the YTM is close to the coupon rate of 12% for this explanation. The after-tax cost of debt = 12% * (1 - 40%) = 7.2%. Given the choices, the closest is 7.7%, acknowledging some simplification in the calculation and potential rounding differences.

If a Corporation Has an Average Tax Rate of 40