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

For which capital component must you make a tax adjustment when calculating a firms weighted average cost of capital (WACC)?

Preferred stock

Equity

Debt

Andalusian Limited (AL) can borrow funds at an interest rate of 7.30% for a period of eight years. Its marginal federal-plus-state tax rate is 25%. ALs after-tax cost of debt is (rounded to two decimal places).

At the present time, Andalusian Limited (AL) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If AL 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.)

6.09%

4.87%

5.48%

7.31%