interest rate-tax savings
marginal tax-required return
interest rate + tax savings
borrowing cost + embedded cost
Answer is Right!
Answer is Wrong!
The correct answer is: C. interest rate + tax savings.
The after-tax component cost of debt is the cost of debt after taking into account the tax savings associated with interest payments. The formula for the after-tax component cost of debt is:
After-tax component cost of debt = (1 – tax rate) * interest rate
For example, if the interest rate on a loan is 10% and the tax rate is 20%, the after-tax component cost of debt is:
After-tax component cost of debt = (1 – 0.2) * 0.1 = 0.08 = 8%
The other options are incorrect. Option A, interest rate – tax savings, is the before-tax component cost of debt. Option B, marginal tax – required return, is the cost of equity. Option D, borrowing cost + embedded cost, is the total cost of debt.