Assume the following information for Brama Co., a U.S.-based MNC that needs funding for a project in Germany: U.S. risk-free rate = 4%
German risk-free rate = 5%
Risk premium on dollar-denominated debt provided by U.S. creditors = 3%
Risk premium on euro-denominated debt provided by German creditors = 4%
Beta of project = 1.2
Expected U.S. market return = 10%
U.S. corporate tax rate = 30%
German corporate tax rate = 40%
What is Brama's after-tax cost of dollar-denominated debt?
A) 7.0%.
B) 4.9%.
C) 8.0%.
D) 5.6%.

Question

Quizplus · Accepted Answer

The after-tax cost of dollar-denominated debt can be calculated using the following formula: 
After-tax cost of debt = before-tax cost of debt x (1 - tax rate)

Before-tax cost of debt = U.S. risk-free rate + risk premium on dollar-denominated debt 
= 4% + 3% 
= 7%

After-tax cost of debt = 7% x (1 - 30%) 
= 4.9%

Therefore, the answer is B.

Assume the Following Information for Brama Co