When using the cost of debt,the relevant number is the:
A) pre-tax cost of debt, since most corporations pay taxes at the same tax rate.
B) pre-tax cost of debt, since it is the actual rate the firm is paying bondholders.
C) post-tax cost of debt, since dividends are tax deductible.
D) post-tax cost of debt, since interest is tax deductible.
E) None of these.

Question

Quizplus · Accepted Answer

The post-tax cost of debt is the relevant number because interest paid on debt is tax-deductible, meaning it reduces taxable income. Therefore, the effective cost of debt is lower after considering the tax benefits of debt financing.

When Using the Cost of Debt,the Relevant Number Is The