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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