If corporate tax rates were increased, such that the marginal tax rate for most companies goes from 35 percent to 45 percent, this increase on the after-tax cost of debt:
A) increases the cost of debt.
B) decreases the cost of debt.
C) does not affect the cost of debt.

Question

Quizplus · Accepted Answer

An increase in corporate tax rates decreases the after-tax cost of debt because interest payments are tax-deductible, thus reducing the effective interest expense.

If Corporate Tax Rates Were Increased, Such That the Marginal