True or False? Statement about After Tax Cost of Debt

CFA Level I Corporate Finance
#1

Is the following statement true or false?

“The appropriate tax rate to use in the adjustment of the before-tax cost of debt to determine the after-tax cost of debt is the average tax rate because interest is deductible against the company’s entire taxable income”

According to CFAI practice problem solutions, the answer is false, but I am completely thrown by the wording of this statement and the solution as well. Can someone explain how the statement is false? is the “avergae tax rate” is the appropraite tax rate to use false or the latter part “i_nterest is deductible against…_” part false? or maybe both? The solution just says “the cost of debt is further reduced if interest expense is tax deductible.” How does this explain the falseness of the above statement? I am very much befuddled here.

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#2

I see that this analysis is in the context of cost of capital calculation, most likely the WACC rate of the company (weighted average cost of capital).

The after-tax cost of debt is part of WACC calculation, so in this context… what is the appropriate tax rate to calculate after-tax cost of debt? A really good question.

The thing here is that companies may face different tax rates depending their level of income or kind of business. So, the term “marginal tax rate” appears. Marginal tax rate is the tax rate applied that the last tranch of income.

Using weighted average tax rate seems logical, but I would use the marginal tax rate, at least for WACC calculation context.

Sorry If I couldn’t respond all your queries. Can you type the whole question please?

Cheers!

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