Final answer:
The after-tax cost of debt for OCP, given an interest rate of 9.70% and a tax rate of 25%, is approximately 7.28%.
Step-by-step explanation:
The student asked about the after-tax cost of debt for Omni Consumer Products Company (OCP), which is calculated by taking the nominal interest rate the company can borrow at and adjusting it for the tax shield provided by interest payments being tax-deductible. Since the company's tax rate is 25%, and the nominal interest rate is 9.70%, the after-tax cost of debt is calculated as 9.70% multiplied by (1 - 0.25).
Doing the math, 9.70% * (1 - 0.25) is equal to 7.275%, which is approximately 7.28%. Therefore, the correct answer to the student's question is (a) 7.28%.