Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of $12,000,000 and a cost of equity of 12%. Springfield's after-tax cost of debt is:
A).0320
B).0480
C).0800
D).0912

Question

Quizplus · Accepted Answer

After-tax cost of debt= Interest rate*(1-tax rate)
= 8%*(1-0.4)
= 0.048 or 4.80%

Therefore, the correct answer is B. 0.0480.

Springfield Corporation, Whose Tax Rate Is 40%, Has Two Sources