Calculate after tax cost of debt on a zero coupon bond

The Welch Corporation is planning a zero coupon bond issue. The bond has a par value of $1000, matures in 10 years, and will be sold at an 80% discount, or for $200. The firm's marginal tax rate is 40%. What is the annual after-tax cost of debt to Welch on this issue?

a) 10.48%
b) 10%
c) 11.62%
d) 14.79%
e) 17.46%

Solution Summary

Solution provides step by step structured solution to calculate a firms cost of debt, net of tax, to issue a bond. Specifically, a zero coupon bond.