Question

Other things remaining the same, an increase in the tax rate on corporate profit will

(a) make the debt relatively cheaper

(b) make the debt relatively the dearer

(c) have no impact on the cost of debt

(d) we can’t say

Answer 1

(a) When there is an increase in the tax on corporate profit, the debt becomes relatively cheaper. This is because interest that is to be paid to the debtors is deducted from the total income before calculating the value of tax. Thus, as the value of tax increases, the debt becomes relatively cheaper.