Answer:
Option C is correct answer
Explanation:
We have the following details:
Cost of Debt (Kd) = 12%
Tax Rate = 30%
Cost of debt for discounting Capital Project is Post Tax Cost of debt
The reason of this is that the Interest paid on debt is eligible for tax deduction, Hence Post Tax cost of debt will be used for discounting the project cashflows
Discount rate = Cost of Debt * ( 1 - Tax rate )
= 12% * (1 - 0.30)
= 12% * (0.70)
= 8.4% is the cost of debt that should be used in calculating the cost of capital for capital budgeting purposes.
