Times Corporation, whose tax rate is 30%, has two sources of funds: long-term debt with a market value of $6,500,000 and an interest rate of 7%, and equity capital with a market value of $18,000,000 and a cost of equity of 11%. Times Corporation's after-tax cost of debt is ________.
A) 9.38%
B) 4.90%
C) 7.00%
D) 11.00%

Question

Quizplus · Accepted Answer

After-tax cost of debt = 0.07 × (1 - 0.3) = 4.90%

Times Corporation, Whose Tax Rate Is 30%, Has Two Sources