Answer:
After-tax cost of debt is 7.77%
Explanation:
After-tax cost of debt=pre-tax cost of debt*(1-tax rate)
pretax-cost of debt is 11.10%
tax rate is 30%
After-tax cost of debt=11.10%*(1-30%)
=11.10%*(1-0.3)
=11.10%*0.7
=7.77%
The after-tax cost of debt considers the tax shield opportunity brought about by paying interest on the bond,by tax shield the fact that interest is a deductible expense for tax purposes,the interest expense reduces overall tax liability unlike a situation where no such expense was incurred.
