3. 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

a) (1+T)

b) (1-T)

Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 7.30% for a period of six years. Its marginal federal-plus-state tax rate is 35%. WGCs after-tax cost of debt is (rounded to two decimal places).

At the present time, Western Gas & Electric Company (WGC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,438.04 per bond, carry a coupon rate of 14%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 35%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)?

2.68%

2.41%

3.22%

2.14%