The fact that the after-tax cost of debt is lower than the pre-tax cost of debt implicitly assumes that interest expense can be:

Question

Quizplus · Accepted Answer

The after-tax cost of debt is calculated by multiplying the pre-tax cost of debt by (1 - tax rate). This assumes that the interest expense can be expensed, meaning it is tax-deductible. If the interest expense cannot be deducted from taxable income, then there would be no difference between the pre-tax and after-tax cost of debt. Margining and refinancing are not relevant to this calculation.

The Fact That the After-Tax Cost of Debt Is Lower