Times Corporation,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 9%,and equity capital with a market value of $18,000,000 and a cost of equity of 11%.Times Corporation's after-tax cost of debt is ________.
A) 3.40%
B) 5.40%
C) 5.00%
D) 7.40%

Question

Quizplus · Accepted Answer

The after-tax cost of debt formula is: Cost of Debt x (1 - Tax Rate)

Thus, the after-tax cost of debt for Times Corporation is:
9% x (1 - 0.40) = 5.40% (B)

Therefore, the best choice is B since it is the correct calculation of the after-tax cost of debt.

Times Corporation,whose Tax Rate Is 40%,has Two Sources of Funds