This kept me up all night Sunday
Maybe someone could walk me through the question:
We find MV of debt and Equity - OK with this
We determine capital structure - OK with this
In calculating Cost of Debt - why do we adjust expected yield of the new issue by the company’s marginal tax rate? I get the idea that “debt payments are tax deducticble”, however, Im a bit shaky on the whole thing though.
–> If I were to think this way: YTM on a debt issue is how much the debt holders will earn, thus this is sort of a negative expense to the company, thus if payments are tax deductible, this will lower company’s cost of debt?!
Help me break down this concept please! Thanks!