After-tax cost of debt is calculated as r_d*(1 - tax rate). If pre-tax cost of debt is 8% and tax rate is 30%, what is the after-tax cost?

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Multiple Choice

After-tax cost of debt is calculated as r_d*(1 - tax rate). If pre-tax cost of debt is 8% and tax rate is 30%, what is the after-tax cost?

Explanation:
Interest expense is tax-deductible, so the cost of debt after taxes is reduced by the tax shield. Multiply the pre-tax cost by (1 − tax rate). Here: 8% × (1 − 0.30) = 8% × 0.70 = 5.6%. Therefore, the after-tax cost is 5.6%. The other values would come from different tax rates: for example, a 25% tax rate would give 6%, a 50% rate would give 4%, and a 40% rate would give 4.8%.

Interest expense is tax-deductible, so the cost of debt after taxes is reduced by the tax shield. Multiply the pre-tax cost by (1 − tax rate). Here: 8% × (1 − 0.30) = 8% × 0.70 = 5.6%. Therefore, the after-tax cost is 5.6%. The other values would come from different tax rates: for example, a 25% tax rate would give 6%, a 50% rate would give 4%, and a 40% rate would give 4.8%.

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