Detailed Answer
(b) The requirement is to calculate the first-year, beforetax
cost of the planned debt financing, net of floatation costs.
The first year cost would be calculated by dividing the interest
rate by the amount of funds received after floatation costs.
Therefore, the interest cost before tax is equal to 8% ÷ (101%
issue price – 2% floatation costs) = 8.08%. Therefore, the correct
answer is (b).