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Interest rate is 12 and tax savings (1-0 40) then after-tax...

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Financial Management
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Interest rate is 12% and tax savings (1-0.40) then after-tax component cost of debt will be

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Correct Answer: Option A
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Zeeshan Abdullah
Zeeshan Abdullah 3 years ago
To calculate the after-tax component cost of debt, we need to take into account the tax savings due to the deductibility of interest expenses from taxable income. The formula for the after-tax cost of debt is:

After-tax cost of debt = Pre-tax cost of debt × (1 - Tax rate)

Given that the interest rate is 12% and the tax rate is 40% (1 - 0.40 = 0.60), we can calculate the after-tax component cost of debt:

After-tax cost of debt = 12% × (1 - 0.40) = 12% × 0.60 = 7.20%

Therefore, the correct answer is option A. 7.20%.
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