Calculate the cost of debt for the following firm:
Borrowing Rate 9.5%
Marginal Tax Rate 34%
Credit Rating BB+
Owner's Equity 15%
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A. B. C. D. E.Explanation
The cost of debt is simply the rate of borrowing less the tax savings. Due to the fact that interest expense is tax deductible, the cost of debt in this case is 9.5%(1 -
.34) = 9.5%(.66) = 6.27%.