The after-tax cost of debt for purposes of estimating a company's weighted-average cost of capital (WACC)
A) Requires an estimate of the yield-to-maturity for long-term bonds.
B) Is equal to the pretax cost of debt times t, where t = income tax rate.
C) Is equal to the pretax cost of debt/(1 − t), where t = income tax rate.
D) Is approximated by the firm's short-term borrowing rate.
E) Is estimated using the Capital Asset Pricing Model (CAPM).

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated by taking the yield-to-maturity of the company's long-term bonds and adjusting it for taxes, which is done by multiplying the pretax cost of debt by (1 - t), where t is the income tax rate.

The After-Tax Cost of Debt for Purposes of Estimating a Company's