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 12.50% for a period of five years. Its marginal federal-plus-state tax rate is 35%. 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 $1,092.79 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 35%. 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)?

6.19%

7.12%

4.95%

7.43%