Problem:
Suppose a zero-coupon bond is selling for $614.00 today. It promises to pay $1,000 in exactly 10 years with annual componding.
Requirement:
Question: What is the firm's after-tax cost if this is its sole debt outstanding (assuming the firm is in the 20% tax bracket?
a) 4%
b) 5%
c) 6%
d) 7%
Note: Show all workings.