A firm has a pre-tax cost of debt of 8.5%.If the firm has a marginal tax rate of 40%,what is its effective cost of debt?
A)5.1%
B)3.4%
C)8.5%
D)8.1%
E)7.2%

Question

Quizplus · Accepted Answer

The effective cost of debt is calculated by taking the pre-tax cost of debt and adjusting it for taxes, using the formula: Effective Cost of Debt = Pre-Tax Cost of Debt * (1 - Tax Rate). Therefore, 8.5% * (1 - 0.40) = 5.1%.

A Firm Has a Pre-Tax Cost of Debt of 8