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22 January, 22:08

The​ after-tax cost of debt is higher than the​ before-tax cost of debt. True or False

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  1. 22 January, 22:21
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    False

    Explanation:

    The after cost of debt is always lower than the before tax cost of debt. For example, a company borrows $1,000,000 and pays 7% interest per year. This results in $70,000 in interest expense before taxes = $1,000,000 x 7% = $70,000.

    The after tax cost of the debt = $1,000,000 x 7% x (1 - tax rate) = $1,000,000 x 7% x (1 - 21%) = $1,000,000 x 7% x 0.79 = $55,300
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