When using the cost of debt, the relevant number is the:
A) pre-tax cost of debt since most corporations pay taxes at the same tax rate.
B) pre-tax cost of debt since it is the actual rate the firm is paying bondholders.
C) post-tax cost of debt since dividends are tax deductible.
D) post-tax cost of debt since interest is tax deductible.

Question

Quizplus · Accepted Answer

The correct answer is D) post-tax cost of debt since interest is tax deductible. This is because the interest expense on debt reduces the taxable income of a corporation, effectively lowering the actual cost of borrowing.

When Using the Cost of Debt, the Relevant Number Is