The formula to calculate the Marginal Corporate Tax Rate is:
\[ \text{Marginal Corporate Tax Rate} = 1 - \frac{\text{Net Income}}{\text{Pre-tax Income}} \]
The formula to calculate the After-tax Cost of Debt is:
\[ \text{After-tax Cost of Debt} = \text{Pre-tax Cost of Debt} \times (1 - \text{Marginal Corporate Tax Rate}) \]
The After-tax Cost of Debt measures the effective interest rate a company pays on its debt after accounting for tax deductions. It helps determine the true cost of borrowing for a company, considering the tax savings on interest expenses.
Let's assume the following:
To calculate the Marginal Corporate Tax Rate:
\[ \text{Marginal Corporate Tax Rate} = 1 - \frac{800,000}{1,000,000} = 1 - 0.8 = 0.2 = 20\% \]
To calculate the After-tax Cost of Debt:
\[ \text{After-tax Cost of Debt} = 8\% \times (1 - 20\%) = 8\% \times 0.80 = 6.4\% \]
Therefore, the After-tax Cost of Debt is 6.4%.
