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)? O Debt O Preferred stock O Equity Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of eight years. Its marginal federal-plus-state tax rate is 25%. WGC's after-tax cost of debt is (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,229.24 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WGC 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.) o 2.85% 0 4.27% O 3.56% 04.09% 3. The cost of preferred stock Preferred stock is a hybrid security, because it has some characteristics typical of debt and others typical of equity. The following table lists various characteristics of preferred stock. Determine which of these characteristics is consistent with debt and which is consistent with equity. Characteristics Has a par, or face, value. Failure to pay a preferred dividend does not send the firm into bankruptcy. Debt Equity o O O O Consider the case of Ferro Enterprises: At the present time, Ferro Enterprises does not have any preferred stock outstanding but is looking to include preferred stock in its capital structure in the future. Ferro has found some institutional investors that are willing to purchase its preferred stock issue provided that it pays a perpetual dividend of $13 per share. If the investors pay $100.15 per share for their investment, then Ferro's cost of preferred stock (rounded to four decimal places) will be