Rogue River Retail Inc. has a before-tax cost of debt of 8.00%, a cost
Rogue River Retail Inc. has a before-tax cost of debt of 8.00%, a cost of equity of 12.00%, a tax rate of 30.00% and no preferred stock outstanding. If the firm is made up of 50% debt and 50% equity, what is the firm’s after-tax cost of borrowing?
A) 12.00%
B) 11.60%
C) 8.00%
D) 5.60%
ANSWER
D
Explanation: D) = Kd (1-t) = 8% * (1-.3 ) = 5.60%.
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