Question

A firm is 64.00% equity. It has a cost of equity of 12.00%, a pre-tax cost of debt of 8.00%, and a marginal tax rate of 30.00%. What is the firm's after-tax cost of debt?

Answer 1

To calculate the after-tax cost of debt, you can use the following formula:

\[
\text{After-tax cost of debt} = \text{Pre-tax cost of debt} \times (1 - \text{Tax rate})
\]

Given:

- Pre-tax cost of debt = 8.00% or 0.08
- Tax rate = 30.00% or 0.30

Now, substituting the values into the formula:

\[
\text{After-tax cost of debt} = 0.08 \times (1 - 0.30)
\]
\[
\text{After-tax cost of debt} = 0.08 \times 0.70
\]
\[
\text{After-tax cost of debt} = 0.056
\]

Converting this back to percentage:

\[
\text{After-tax cost of debt} = 0.056 \times 100 = 5.60\%
\]

Therefore, the firm's after-tax cost of debt is **5.60%**.