If a company's before-tax cost of borrowing is 12% and its tax rate is 40%, then the company's after-tax cost of borrowing is 7.2%

Question

Quizplus · Accepted Answer

To calculate the after-tax cost of borrowing, we need to subtract the tax savings from the before-tax cost of borrowing. The tax savings is equal to the tax rate multiplied by the before-tax cost of borrowing.

Tax savings = 0.40 x 0.12 = 0.048

After-tax cost of borrowing = 0.12 - 0.048 = 0.072, which is equal to 7.2% when expressed as a percentage.

If a Company's Before-Tax Cost of Borrowing Is 12% and Its