What Is the After-Tax Cost of Debt for a Firm

question 1

Multiple Choice

What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its debt?

• A) 5.25%
• B) 9.75%
• C) 12.17%
• D) 20.25%

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Definitions:

Operating Cycle

The period of time it takes for a company to purchase inventory, sell it, and turn the sales back into cash.

Allowance for Doubtful Accounts

A contra-asset account used to reduce accounts receivable to its net realizable value, anticipating some accounts might not be collected.

Accounts Receivable

Funds that customers owe to a firm for delivered goods or services which have not yet been settled.

Bad Debt Expense

The portion of receivables that a company does not expect to collect, often treated as an expense in the income statement.