If a firm is losing money then the after-tax cost of debt is ____.

Question

Quizplus · Accepted Answer

The after-tax cost of debt is still the cost of borrowing funds, but it is adjusted for the tax savings that come from the interest expense being tax-deductible. However, if a firm is losing money and not paying taxes, there will be no tax savings, and therefore the after-tax cost of debt would be equal to the pretax cost of debt. Option A appears to be an incorrect formula, Option B is not a feasible method, and Option D is specific to callable bonds and not applicable in this scenario.

If a Firm Is Losing Money Then the After-Tax Cost