Detailed Answer
Answer (B) is correct. The cost of new debt equals the annual interest divided by the net issue proceeds. The annual interest is $1.2 million ($15,000,000 × .08 coupon rate). The proceeds amount to $14,850,000 [($15,000,000 × 1.01) market price – ($15,000,000 × .02) flotation costs]. Thus, the company is paying $1.2 million annually for the use of $14,850,000, a cost of 8.08% ($1,200,000 ÷ $14,850,000).