Question：

　　The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the

　　firm must be estimated. The following information for FLF Corporation is provided:

　　● The market price of common stock is $60 per share.

　　● The dividend next year is expected to be $3 per share.

　　● Expected growth in dividends is a constant 10%.

　　● New bonds can be issued at face value with a 10% coupon rate.

　　● The current capital structure of 40% long-term debt and 60% equity is considered to be optimal.

　　● Anticipated earnings to be retained in the coming year are $3 million.

　　● The firm has a 40% marginal tax rate.

　　The after-tax cost to FLF Corporation of the new bond issue is

　　A. 14%

　　B. 6%

　　C. 10%

　　D. 4%

　　Answer（B）：

　　Answer (A) is incorrect. The after-tax cost will be less than the effective before- tax rate.

　　Answer (B) is correct. Because the bonds are issued at their face value, the pretax effective rate is 10%. However, interest is deductible for tax purposes, so the government absorbs 40% of the cost, leaving a 6% after-tax cost.

　　Answer (C) is incorrect. This figure is the before-tax rate.

　　Answer (D) is incorrect. This figure results from using a 60% tax rate.