A firm's aftertax cost of debt will increase if there is a(n):

Question

BlackTom AI · Accepted Answer

Reframing the question helps focus on what drives aftertax debt costs in a typical corporate finance setting.
Option 1: 'decrease in the company's debt-equity ratio.' A lower D/E ratio often reflects less leverage, which can influence the cost of debt indirectly via credit quality, but it does not inherently raise the aftertax cost of debt. In fact, with less leverage, a firm might enjoy a higher aftertax cost of debt only if debt issuances become more expensive for some unrelated reason; otherwise, this change is not a direct mechanism that increases aftertax debt cost. So this option is not a guaranteed cause of higher aftertax debt cost.
Option 2: 'increase in the credit rating of the company's bonds.' An improved credit rating typically lowers the cost of debt because lenders demand less return for lower risk. Therefore, this would reduce, not increase, the aftertax cost of debt. This option is clearly contrary to how debt pricing works.
Option 3: 'decrease in the company's tax rate.' The aftertax cost of debt is calculated as pretax cost of debt times (1 minus the tax rate): r_d(1 - T). When the tax rate falls, the tax shield from debt diminishes, making the aftertax cost of debt higher. This is the direct, textbook mechanism by which aftertax debt cost rises.
Option 4: 'increase in the company's beta.' Beta measures systematic risk and influences the cost of equity, not the cost of debt. Unless there’s an unusual cross-channel effect, debt costs depend on interest rates and credit risk, not beta. Thus this change does not inherently raise the aftertax cost of debt.
Option 5: 'decrease in the market rate of interest.' Lower market interest rates reduce the cost of debt in the first place, so the aftertax cost would fall, not rise. This option would move the cost in the opposite direction.
In summary, the only option that directly leads to a higher aftertax cost of debt is a decrease in the tax rate, since it reduces the tax shield that debt provides to the firm.

A firm's aftertax cost of debt will increase if there is a(n):单项选择题

类似问题

A company has outstanding long-term debt with a yield to maturity of 7.5% and a marginal income tax rate of 30%. Given this information, what is the after-tax cost of debt for this company?

Rockingham Motors issued a 20-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 98.6 percent of its face value. The company's tax rate is 35 percent. What is the aftertax cost of debt?

A company is issuing bonds that have a $1,000 face value and that pay an annual coupon of $62. The flotation cost associated with these bonds is 12.3% and they have a market value of $1,135.22. The bonds mature in 15 years. The firm’s marginal tax rate is 35%. What is the after-tax cost of debt?

TB MC Qu. 60 USA Manufacturing issued... USA Manufacturing issued 30-year, 7.2 percent semiannual bonds 6 years ago. The bonds currently sell at 101 percent of face value. What is the firm's aftertax cost of debt if the tax rate is 21 percent?

Which of the following statements regarding the aftertax cost of debt is accurate?

Galvatron Metals has a bond outstanding with a coupon rate of 6.1 percent and semiannual payments. The bond currently sells for $1,933 and matures in 19 years. The par value is $2,000 and the company's tax rate is 22 percent. What is the company's aftertax cost of debt?

Venus Limited has market value of debt of $80 million, market value of equity of $140 million, and cash of $20 million. The pre-tax cost of debt is 10%, the cost of equity is 14%, and the tax rate is 30%. The after-tax cost of debt is …………

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单