Which of the following mathematical expressions is used to calculate the after-tax cost of debt, r_dT?

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated as the bondholders' required rate of return (yield to maturity) minus the tax savings on interest payments. This is because interest payments are tax deductible, and the tax savings reduce the effective cost of borrowing. Option A refers to the firm's internal rate of return, which is not relevant to calculating after-tax cost of debt. Option B is also incorrect because tax savings reduce the effective cost of borrowing, rather than being subtracted from the internal rate of return. Option D is irrelevant because dividend payments are not related to the cost of debt. Option E refers to interest payments, but does not account for the tax savings.

Which of the Following Mathematical Expressions Is Used to Calculate