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%.