# To calculate the after-tax cost of debt, multiply the before-tax cost of debt byWestern Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of four years. Itsmarginal federal-plus-state tax rate is 40%. WGC's after-tax cost of debt is(rounded to two decimalplaces)At the present time, Western Gas & Electric Company (WGC) has 20-year noncallable bonds with a face value of\$1,000 that are outstanding. These bonds have a current market price of \$1,382.73 per bond, carry a coupon rate of13%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. If WGCwants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimalplaces)?4.78%5.31%4.25%6.37%

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Step 1

Question 1:

To calculate the after-tax cost of debt, multiply the before-tax cost of debt by “1-Tax Rate” (for example, 4%*(1-10%) = 3.6%).

Step 2

Question 2:

Calculation of After-tax Cost of Debt:

The after-tax cost of debt is 6.66%.

Step 3

Question 3:

Calculation of After-tax Cost of Debt:

The after-tax cost of debt is 5.31%.

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