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

Question

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

A. Before-tax cost of debt.

B. After-tax cost of debt.

Bedrick Co. Can borrow at an interest rate of 7.3% for a period of eight years. Its marginal federal-plus state tax rate is 40%. What is Bedrick's after-tax cost of debt?

A. 5.1%

B. 4.8%

C. 3.7%

D. 4.4%

Bedrick Co. has an outstanding 10-year non-callable Bond with a face value of $1,000. These bonds have a current market price of $1,278.41 and an annual coupon rate of 11%. The company faces a tax rate of 40%. If the company wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt?

A. 4.85%

B. 4.22%

C. 5.06%

D. 3.38%

Explanation / Answer

Interest payments are tax deductible. Hence, interest payments reduce the cost of interest by reducing tax liability.

Though company cost is after-tax cost of debt, it will pay before tax cost of debt to bond holders.

Hence correct option is before-tax cost of debt.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.