IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation
Bharat Metals Ltd has a 10% pre-tax cost of debt on its borrowings and pays corporate tax at 25%. Interest is fully deductible. What is the after-tax cost of debt?
The after-tax cost of debt is 7.5%. It is found by multiplying the 10% pre-tax interest rate by one minus the 25% tax rate, because each rupee of interest saves 25 paise of tax.
- A12.5%
- B10.0%
- C2.5%
- D7.5%Correct
- 5.0%
Explanation
After-tax cost = 10% x (1 - 0.25) = 7.5%. The option 2.5% is just the tax saving, not the cost. The option 12.5% wrongly divides by 0.8 or grosses up.
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