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NEW QUESTION: 1
Calculate the cost of debt for the following firm:
Borrowing Rate 10%
Marginal Tax Rate 40%
Project IRR 12.5%
Owner's Equity 15%
A. 1.5%
B. 27.5%
C. 10%
D. 6%
E. 60%
Answer: D
Explanation:
Explanation/Reference:
Explanation:
The cost of debt is simply the rate of borrowing less the tax savings. Due to the fact that interest expense is tax deductible, the cost of debt in this case is 10%(1 - .4) = 10%(.6) = 6%.