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

To calculate the after-tax cost of debt, multiply the before-tax cost of debt by .

Andalusian Limited (AL) can borrow funds at an interest rate of 12.50% for a period of four 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 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 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 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.)

3.38%

2.35%

3.53%

2.94%