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.
E)None of the above.

Question

Quizplus · Accepted Answer

The post-tax cost of debt is the most relevant number because interest payments made on debt are tax-deductible, meaning that the actual cost to the firm is reduced by the amount of tax savings. Therefore, the post-tax cost of debt reflects the true cost of borrowing for the firm.

When Using the Cost of Debt, the Relevant Number Is