LipTea Incorporated purchases raw materials and has processing plants around the world. They also have an international market for their product. Because of their presence in so many countries LipTea has the ability to raise capital around the world in several different markets. LipTea is truly an MNE. If the firm has an average pre-tax cost of debt of 8%, a cost of equity of 13%, and an average tax rate of 40%, what is their after-tax cost of debt?
A) 3.2%
B) 8.0%
C) 4.8%
D) 10.5%

Question

Quizplus · Accepted Answer

To calculate the after-tax cost of debt, we use the formula:

After-tax cost of debt = Pre-tax cost of debt x (1 - Tax rate)

Plugging in the given numbers, we get:

After-tax cost of debt = 8% x (1 - 40%) = 4.8%

Therefore, the answer is choice C, 4.8%.

LipTea Incorporated Purchases Raw Materials and Has Processing Plants Around