The cost of debt is equal to one minus the marginal tax rate times the coupon rate of interest on the firm's outstanding debt.

Question

Quizplus · Accepted Answer

The cost of debt is actually equal to the coupon rate of interest on the firm's outstanding debt times one minus the marginal tax rate, not the other way around. This is because the interest expense on debt is tax-deductible, reducing the effective cost of debt to the firm.

The Cost of Debt Is Equal to One Minus the Marginal