The 'cost of debt' is the before-tax cost of debt while the effective cost of debt is the after-tax cost of debt, which is lower for a profitable tax-paying firm.

Question

Quizplus · Accepted Answer

This statement is true. The cost of debt is the interest rate a company pays on its debt before taxes, while the effective cost of debt includes the tax benefits the company receives from deducting the interest expense on its tax returns. As a result, the effective cost of debt is lower than the before-tax cost of debt for a profitable tax-paying firm.

The 'Cost of Debt' Is the Before-Tax Cost of Debt