The ________ cost of debt to the firm can be ________ once the tax deductibility of interest payments is considered.
A) equivalent; lower
B) equivalent; effective
C) effective; higher
D) effective; lower

Question

Quizplus · Accepted Answer

The effective cost of debt takes into account the tax deductibility of interest payments, which lowers the cost to the firm. Therefore, the effective cost of debt is lower than the nominal, or stated, cost of debt. Option D correctly identifies this relationship.

The ________ Cost of Debt to the Firm Can Be