Question

Cost of debt A,B,C is 7.5% ,2 % and 7.3%, respectively. Compare the effective cost of debt between A B C, explain

Answer 1

Assuming that the cost of debt given is after tax we see that B has the lowest cost at 2% which implies that the cost of Financing operations using debt b is the lowest.Debt C has the next lowest cost at 7.3 percent. Hence if the company needs to take on more debt C will be preferred over A. Finally a has the highest cost at 7.5 % and hence should only be undertaken after exhausting the limits for debts B and C.

However if we assume that the cost of debt given is before tax,effective cost of debt should be calculated as

Cost= Rate* (1-tax)

In that scenario the analysis would remain the same. However the difference between the effective cost would decrease.