The cost of a firm's debt is determined by taking the
A) present value of the interest payments and principal times one minus the tax rate.
B) coupon rate on bonds times one minus the tax rate.
C) yield on bonds issued minus the corporation's marginal tax rate.
D) None of these options are true.

Question

Quizplus · Accepted Answer

The cost of a firm's debt is the yield on bonds issued minus the corporation's marginal tax rate. This is because interest paid on debt is tax-deductible, so the after-tax cost of debt is lower than the before-tax cost. Therefore, the cost of debt to the corporation is the yield on the bonds minus the tax savings from the interest payments.

The Cost of a Firm's Debt Is Determined by Taking