I keep getting the wrong outcome in the below question;

A target capital structure of 20% preferred stock, 30% common equity and 50% debt. The company has outstanding a 7% annual coupon-paying, 20-year maturity and $1,000 par bond. Currently the bond is selling for $932.5. The company is expected to have the constant growth rate of 10% and its stock is selling for $100 per share. Next year’s dividend is expected to be $3 per share. The company’s $1,000 face value preferred stock currently sells for $900 and has a dividend rate of 6%. If the company’s marginal tax rate is 35%, what is the after-tax cost of debt?

A. 4.55%

B. 7.99%

C. 5.20%

I believe my error is that I’m using $70 as the coupon instead of $35; but my question is why is the Coupon multiplied by 50%?

This was an Apptuto question. I believe it may be a mistake.

I had chosen 4.99% as the answer hence my surprise to be told it’s incorrect.

Here is the solution from Apptuto:

“If the bonds are trading at $932.5 per $1000 par, the required yield will be: N = 10*2=20; PV = -932.5 ; FV = 1000; PMT = 1000*7%*0.5 = 35; CPT I / Y = 4.00%. annual rate = 4.00%*2 = 8.00% The after-tax cost of the debt is: 8% x (1-0.35) = 5.20% You might have taken coupon rate instead of yield for the cost of debt.”