a.
To discuss:
To calculate the before-tax and after –tax cost of debt using approximation formula.
Introduction:
The before -tax cost debt is the
When after tax cost of the debt is ri and rd is the before-tax cost of a debt, with the tax rate of the firm T, before-tax cost can be converted to after -tax cost by using the following equation,
Using the approximation the before-tax cost of the debt is calculated when the annual interest payment in dollars (I), the net proceeds from the sale of a bond (Nd) and term of the bond in years (n) , using the equation,
b.
To discuss:
Comparison between the two approaches.
Introduction:
The before -tax cost debt is the rate of return the firm must pay on a new borrowing. The after-tax cost of a debt is the cost after deducting the tax amount.
When after tax cost of the debt is ri and rd is the before-tax cost of a debt, with the tax rate of the firm T, before-tax cost can be converted to after -tax cost by using the following equation,
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