Question

A firm borrow @ 10% & tax rate is 30%.The after tax cost of debt is *
1 point
20
9
12
7

Answer 1

Answer:

7

Explanation:

cost of debt=10*30%= 3

cost of debt after tak =10-3=7

Answer 2

The after-tax cost of debt is 7%.

Explanation:

• The after-tax cost of debt is the net cost of debt or the initial cost of debt. It is determined by adjusting the gross cost of debt for its tax benefits.
• It is the cost of debt that is included in the calculation of the weighted average cost of capital.
• Due to the effect of this deduction, there is a reduction in taxable income, which results in a reduction in income tax.
• To calculate the after-tax cost of debt, we have to subtract the company's incremental tax rate from 100% and then multiply the result by the interest rate on the debt.
• Here, the cost of debt is 10% and the tax rate is 30%:

        cost of debt = 10 * 30% = 3

        after tax cost of debt = 10 - 3 = 7%