Ghan Rail Corporation,whose tax rate is 40%,has two sources of funds: long-term debt with a market value of $8 000 000 and an interest rate of 8%,and equity capital with a market value of $12 000 000 and a cost of equity of 12%.Ghan Rail's after-tax cost of debt is:
A).0800
B).0480
C).0912
D).0320

Question

Quizplus · Accepted Answer

To calculate Ghan Rail's after-tax cost of debt, we need to use the following formula:

After-tax cost of debt = Interest rate x (1 - Tax rate)

Substituting the values given in the question, we get:

After-tax cost of debt = 8% x (1 - 40%) = 4.8% or 0.0480

Therefore, the answer is B) 0480.

Ghan Rail Corporation,whose Tax Rate Is 40%,has Two Sources of Funds