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 .

Three Waters Company (TWC) can borrow funds at an interest rate of 9.70% for a period of eight years. Its marginal federal-plus-state tax rate is 40%. TWCs after-tax cost of debt is (rounded to two decimal places).

At the present time, Three Waters Company (TWC) 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 40%. 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.)

2.12%

1.88%

2.70%

2.35%