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The after-tax cost of debt capital is equal to the yield to maturity on a corporate...

The after-tax cost of debt capital is equal to the yield to maturity on a corporate bond multiplied by (1 - T).

T or F

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Answer #1

The statement is True

The cost of debt refers to the amount spent by the company when they finance their money through debt. It includes payment of interest to bondholders and debentures.

The company has to pay the interest equals the yield to maturity because this the return that the investor demands from the company for the financing.

Pretax cost of debt = Yield to Maturity

After tax cost of debt = yield to maturity × (1 - Tax rate)

Thr tax rate is deducted to arrive at after cost of debt so, if we reduce it from yield to maturity, it will become equal.

Therefore, statement is true

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