Question

Other things remaining the same, an increase in the tax rate on corporate profits will ____________.

• A. make debt relatively cheaper
• B. make debt relatively less cheap domestically
• C. no impact on the cost of debt
• D. can't be determined

Answer 1

The correct option is A make debt relatively cheaper

The 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.