What does after tax cost of debt mean?
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Keeping this in consideration, what is after tax cost of debt?
The after-tax cost of debt is the initial cost of debt, adjusted for the effects of the incremental income tax rate. The formula is: Before-tax cost of debt x (100% - incremental tax rate) = After-tax cost of debt. For example, a business has an outstanding loan with an interest rate of 10%.
One may also ask, is pre tax or after tax cost of debt more relevant? The after-tax rate is more relevant because that is the actual cost to the company. i.e. once you factor in the deduction of interest payments from your tax.
Also, why the after tax cost of debt is the relevant cost of debt?
The cost of new debt is so important because primary concern with the cost of capital is its use in capital budgeting decisions. The yield to maturity on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the coupon rate.
What is an after tax charge?
After-tax income is the net income after the deduction of all federal, state, and withholding taxes. After-tax income, also called income after taxes, represents the amount of disposable income that a consumer or firm has available to spend.