Hi guys i just started on a finance chapter called the cost of capital. I am very confused about the concept of after tax cost of debt. If interest is tax deductible, and lets say interest rate is 5%, shouldn't after tax cost of debt still be 5 % since it is not affected by tax? Why is it lower? Is it because the 5% interest rate (assume its a bond) that the company need to pay to the investor already includes tax for the government in it, meaning the investor only received part of the 5%,hence we must minus the tax off? My point is that why is 1.not affected by tax not=same interest rate and 2.affected by tax not=higher interest rate?
Pls help to clarify my doubts:/ feeling confused.
Pls help to clarify my doubts:/ feeling confused.