$2.$ An overview of a firm's cost of debt

Thebefore$-$tax cost of debt is the interest rate that a firm pays on any new debt financing.

Water and Power Company $($WPC$)$ can borrow funds at an interest rate of $11\mathrm{.}10\%$ for a period of five years. Its marginal federal$-$plus$-$state tax rate is $25\%.$ WPC$$s after$-$tax cost of debt is $8\mathrm{.}32\%($rounded to two decimal places$).$

At the present time, Water and Power Company $($WPC$)$ has $20-$year noncallable bonds with a face value of $$1,000$ that are outstanding. These bonds have a current market price of $$1,181\mathrm{.}96$ per bond, carry a coupon rate of $13\%,$ and distribute annual coupon payments. The company incurs a federal$-$plus$-$state tax rate of $25\%.$ If WPC wants to issue new debt, what would be a reasonable estimate for its after$-$tax cost of debt $($rounded to two decimal places$)?($Note: Round your YTM rate to two decimal place.$)$

$9\mathrm{.}67\%$

$6\mathrm{.}45\%$

$8\mathrm{.}06\%$

$7\mathrm{.}25\%$