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

The after-tax cost of debt can be calculated using the formula:

ATCD = RD(1 - T)

Where:
RD = Before-tax cost of debt
T = Tax rate

Given that Tobin's Barbeque has a bank loan at 8% interest and an after-tax cost of debt of 6%, we can calculate the tax rate as follows:

6% = 8%(1 - T)
T = 0.25 or 25%

Now, if a new loan is taken out yielding 11%, the before-tax cost of debt will be 11%. Therefore, the new after-tax cost of debt can be calculated as follows:

ATCD = 11%(1 - 0.25) = 8.25%

Hence, the best choice is B.

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