If you borrowed $150,000 at an 8% interest rate and pay approximately 35% in taxes, what is your post-tax cost of the debt?

To determine the post-tax cost of the debt, you start by calculating the annual interest expense and then adjusting it for the tax effect. The annual interest expense on the borrowed amount is calculated by multiplying the loan amount by the interest rate. In this case, $150,000 borrowed at an 8% interest rate results in an annual interest payment of $12,000 ($150,000 * 0.08).

Next, you need to account for the tax impact on this interest expense. Because interest expenses are tax-deductible, you can reduce the effective cost of the debt by the tax rate. Here, the tax rate is 35%. To find the after-tax cost of the debt, you multiply the interest expense by (1 - tax rate).

So, the post-tax cost of the debt is calculated as follows:

Post-tax cost = Annual interest expense * (1 - Tax rate)
Post-tax cost = $12,000 * (1 - 0.35)
Post-tax cost = $12,000 * 0.65
Post-tax cost = $7,800

This results in a post-tax cost of debt of $7,800. Therefore, the calculation method captures the tax shield provided by the