Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 166

Synthetic Rating and Cost of Debt for Bookscape

! Rating based on interest coverage ratio = BBB

! Default Spread based upon rating = 1. 50 %

! Pre-tax cost of debt = Riskfree Rate + Default Spread = 4 % + 1. 50 % = 5. 50 %

! After-tax cost of debt = Pre-tax cost of debt ( 1 - tax rate) = 5. 50 % ( 1 -. 40 ) =

3. 30 %

The tax rate used is the marginal tax rate.... Interest savings you taxes on your

marginal income, not first or average dollar of income....