after tax cost of debt

CFA Level I
#1

after tax cost of debt -=interest rate of debt - tax savings = Kd-Kdt= Kd(1-t) question is, this tax is spent portion, no? why they call it a “saving”?

#2

Debt has a tax savings. So debt costs 10%, tax rate is 30%, therefore debt will cost the firm 10(1-.30) = 7%. It is a better deal than using equity in WACC.

#3

ditchdigger2CFA Wrote: ------------------------------------------------------- > It is a better deal than using equity in WACC. That is until the increased debt forces a reduction in bond rating and increases the cost of raising funds. Not quite the silver bullet but handy none the less.

#4

Marginal cost of capital. I love it!