Calculating the Firm\'s Cost of Debt Let\'s look at how to solve for the after-t

Question

Calculating the Firm's Cost of Debt Let's look at how to solve for the after-tax cost of debt that we need to feed into our weighted-average cost of capital formula. If a company issues bonds that pay a 6% interest rate (which it presumably has to do because that is the rate of return that its bond investors require) and has a tax rate of 35%, what is its after-tax cost of debt? Hint: the after-tax cost of debt- pretax cost of debt x (1 - tax rate). The firm's after-tax cost of debt is | %. (Round to 1 decimal place.)

Explanation / Answer

After tax cost of debt = pre tax cost of debt * (1 - tax rate)

= 6% * (1 - 0.35)

= 4.05%

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