2. An overview of a firm's cost of debt For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital (WACC)? Debt Preferred stock Equity Three Waters Company (TWC) can borrow funds at an interest rate of 11.10% for a period of seven years. Its marginal federal-plus-state tax rate is 25%. TWC's after-tax cost of debt is (rounded to two decimal places). At the present time, Three Waters Company (TWC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,229.24 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal- plus-state tax rate of 25%. IF TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt crounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 4.09% 3.56% 3.20% 2.85%