CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Which of the following is (are) likely to cause an increase in the after-tax cost of debt (kd(1 - T))?

I. An increase in the level of interest rates
II. An increase in tax rates
III. A decrease in tax rates
Correct Answer: I and III

Rising interest rates translate into a higher cost of debt as investors demand higher interest payments on new debt. Lower tax rates translate into a higher cost of debt since debt interest payments are deductible and WACC considers the after-tax cost. Lower tax rates mean smaller deductions and higher after-tax cost.

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