Tobin's Barbeque has a bank loan at 8% interest and an after-tax cost of debt of 6%. What will the after-tax cost of debt be when the loan is due if a new loan is taken out yielding 11%.

Question

Quizplus · Accepted Answer

Since the company has an after-tax cost of debt of 6%, we know that its pre-tax cost of debt is 8% (since interest payments are tax-deductible). 
If the company takes out a new loan at 11%, its pre-tax cost of debt will increase to 11%. 
To calculate the new after-tax cost of debt, we can use the formula: 
After-tax cost of debt = Pre-tax cost of debt x (1 - Tax rate) 
Assuming a tax rate of 30%, we get: 
New after-tax cost of debt = 11% x (1 - 0.3) = 7.7% 
Therefore, the best choice is B, which is closest to our calculated value of 7.7%.

Tobin's Barbeque Has a Bank Loan at 8% Interest and an After-Tax