Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 11.10% for a period of five years. Its marginal federal-plus-state tax rate is 30%. OCP's after-tax cost of debt is (rounded to two decimal places).

After-tax cost of debt is 7.77%

Explanation:

After-tax cost of debt=pre-tax cost of debt * (1-tax rate)

pretax-cost of debt is 11.10%

tax rate is 30%

After-tax cost of debt=11.10% * (1-30%)

=11.10% * (1-0.3)

=11.10%*0.7

=7.77%

The after-tax cost of debt considers the tax shield opportunity brought about by paying interest on the bond, by tax shield the fact that interest is a deductible expense for tax purposes, the interest expense reduces overall tax liability unlike a situation where no such expense was incurred.