2. An overview of a firm's cost of debt For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital (WACC)? Equity Debt Preferred stock Three Waters Company (TWC) can borrow funds at an interest rate of 12.50% for a period of eight years. Its marginal federal-plus-state tax rate is 25%. TWC's after-tax cost of debt is (rounded to two decimal places). At the present time, Three Waters Company (TWC) has 20-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,181.96 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 TWC 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.) 9.67% 8.06% 7.25% 9.27%