A firm currently has 3 million dollars worth of 6% debt outstanding. It can currently borrow in the capital markets at the rate of 7.2%. The firm faces a 40% tax rate.
Its marginal after-tax cost of debt is about:
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A. B. C. D.D
Since debt interest is tax-deductible, the after-tax cost of debt equals 7.2%*(1-40%) = 4.32%. Note that bonds issued in the past are of no relevance since it is the current cost of borrowing that is of concern.