An overview of a firm's cost of debt

The is the interest rate that a firm pays on any new debt financing.

Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 9.70% for a period of four years. Its marginal federal-plus-state tax rate is 45%. 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 45%. 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)?

2.27%

1.82%

2.72%

2.04%