Question

What is the advantage of calculating the cost of debt after taxes?
A.
there is no advantage of calculating cost of debt after taxes
B.
the cost of debt after tax is more expensive than cost before taxes
C.
the cost of debt reduces when calculated after taxes
D.
the interest rates on cost of debt increase with increase in taxes
E.
the tax rate charged for the business is lowered

Answer 1

Answer: C.  the cost of debt reduces when calculated after taxes.

Debt is one of ways of financing and refers to the quantum of loans taken by a company at an agreed interest rate for a specified period of time. Loans require the borrower to pay interest at specified intervals.  

The total interest paid on debt is a tax-deductible expense, and reduces the amount of taxable income on which tax is charged.

If 'i' is the cost of debt, the after-tax cost of debt is calculated as $K_{d} = i(1-t)$, which is lower than the cost of debt.  

Answer 2

Answer:

The cost of debt reduces when calculated after taxes

Explanation:

I just took the test.