What is the formula for the Cost of debt considering tax effect?Answer areaKd = P (1-t)         IKd = I (1-t)        P None of the aboveKd = I          P

Step 1: Break Down the Problem

We need to determine the formula for the cost of debt while considering the tax effect. This typically involves understanding how interest payments are affected by taxation.

Step 2: Relevant Concepts

The cost of debt can be calculated by the formula: $K_d = I \times (1 - t)$ Where:

• $K_d$ = Cost of Debt
• $I$ = Interest Payments
• $t$ = Tax Rate

Step 3: Analysis and Detail

1. Interest Payments (I): This is the interest that the company pays on its debt.
2. Tax Rate (t): The effective tax rate which reduces the overall cost of debt since interest payments are tax-deductible.
3. Therefore, we adjust the interest payments by the factor $(1 - t)$, reflecting the tax shield that lowers the cost of borrowing.

Step 4: Verify and Summarize

To summarize the calculations:

• The correct formula acknowledges the tax effect, making it clear that after-tax interest payments determine the cost of debt.

Final Answer

The correct formula considering the tax effect is: $K_d = I \times (1 - t)$
Thus, the option corresponding to $K_d = I(1-t)$ is the right answer.