Question

Telecom Systems can issue debt yielding 5 percent. The company is in a 30 percent bracket. What is its aftertax cost of debt?

Answer 1

after-tax cost odf debt 0.035 = 3.5%

Step-by-step explanation:

the debt provides a tax shield for companies, as the interest expense, decrease the net income. Interest decrease income and therefore, the tax income associate with the income.

So the cost of debt with taxes is lower, because it lower the income tax expense

the formula will be:

cost of debt ( 1 - tax-rate)

in this case:

0.05 ( 1 - 0.3) = 0.05 x 0.7 = 0.035