The After-tax Cost of Debt
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86 If a tax paying firm pays $100,000 in interest what is the after tax interest cost for firm assuming they are in a 40% tax bracket?
a. 100,00 since interest is paid after taxes are paid
and thus there is no tax shield
b. 40,000 since there is a tax shield on interest
c. 60,000 since there is a tax shield on interest
d. insufficient information to compute
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This solution illustrates how to compute the after-tax cost of debt.
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Remember that interest expense is tax-deductible. Thus, the firm will pay $100,000 but will get to ...
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