The aftertax cost of debt:
A) varies inversely to changes in market interest rates.
B) will generally exceed the cost of equity if the relevant tax rate is zero.
C) will generally equal the cost of preferred if the tax rate is zero.
D) is unaffected by changes in the market rate of interest.
E) is highly dependent upon a company's tax rate.

Question

Quizplus · Accepted Answer

The aftertax cost of debt is highly dependent upon a company's tax rate. This is because interest payments on debt are tax-deductible, reducing the amount of income subject to taxation. Therefore, a higher tax rate leads to a greater tax shield and a lower aftertax cost of debt.

The Aftertax Cost of Debt