The cost of debt used in calculating a company's after-tax financing cost is usually adjusted because interest expense:
Correct answer: A. Creates a tax deduction
- A. Creates a tax deduction
- B. Increases the firm's dividend rate
- C. Eliminates repayment obligations
- D. Raises the nominal value of shares
Explanation
Interest is generally deductible for corporate tax purposes, creating a tax shield. Therefore, the after-tax cost of debt is commonly calculated as the pre-tax cost multiplied by one minus the tax rate.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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