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(1 T) .

Andalusian Limited (AL) 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%. ALs after-tax cost of debt is 8.32% (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 $1,555.38 per bond, carry a coupon rate of 11%, 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.)

3.70%

4.73%

3.29%

4.11%