Consider the following characteristics of firm XYZ:
Stock price $50 -
Annual dividend $2 -
Debt rate 10%
Equity floatation cost 7%
Tax rate 40%
Preferred Stock Par value $100 -
What is the firm's after tax cost of debt?
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A firm's after tax cost of debt may be calculated using the following formula: After Tax Cost of Debt = Cost of Debt x (1 - Tax Rate). In this case the After Tax Cost of Debt = 10% x (1 - 40%) = 10% x 60% = 6%.