What is the after-tax cost of debt for Prescott Corporation if their pre-tax cost is 10.61% and the tax rate is 21%?

To find the after-tax cost of debt for Prescott Corporation, you apply the formula that adjusts the pre-tax cost of debt based on the tax rate. This is done because interest expenses are tax-deductible, which effectively reduces the cost of borrowing.

The formula to calculate the after-tax cost of debt is:

After-tax cost of debt = Pre-tax cost of debt × (1 - Tax rate)

Here, the pre-tax cost of debt is 10.61%, and the tax rate is 21%.

Plugging the values into the formula gives:

After-tax cost of debt = 10.61% × (1 - 0.21)

Calculating (1 - 0.21) yields 0.79. Now multiply this by the pre-tax cost:

After-tax cost of debt = 10.61% × 0.79 = 8.36%

Rounding this, we get approximately 8.4%. This value represents the effective cost of debt after accounting for tax savings due to the deductibility of interest.

Thus, the correct answer reflects the impact of taxation on the cost of debt, showing how corporations can benefit from lower costs associated with borrowing.