Exhibit 7A.1 Gargoyle Unlimited Is Planning to Issue a Zero Coupon Bond

Multiple Choice

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 $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%.
-Refer to Exhibit 7A.1.What is the expected after-tax cost of this debt issue?

A) 5.76%
B) 6.06%
C) 6.38%
D) 6.72%
E) 7.06%