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Effective interest rate

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Why is the effective interest rate on debt multiplied by (1- tax rate) when similar adjustments are not made to the required return on preferred stock and common stock?

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Solution Summary

Reason for multiplying interest rate by (1- tax rate) to get the effective interest rate when similar adjustments are not made to the required return on preferred stock and common stock is given in the solution.

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Hello

PLease see the explaination below (also in word file attached).

Interest expense is tax deductible expense and that's why the actual cost incurred for the company is interest*(1-tax rate). If the interest was not paid then the company has to pay ...

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