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March 26, 2017

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. Fargo Industries has outstanding 30 year bonds at 7% semiannual payments. The bond sells at 90% of its face value. If their tax rate is 22%:
a.What is the aftertax cost of debt?
b. What is the pretax cost of debt?
c. Which is more important in calculating the cost of capital for Fargo, a or b?

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