If a company is borrowing funds @ 10% and the tax rate is 30%, the after-tax cost of debt is only:

7%

The correct answer is Option 1: 7%

The interest expense on the loan is tax-deductible, meaning the company can deduct it from their taxable income. This reduces the company's overall tax liability. By taking the tax rate into account, we arrive at the actual cost of borrowing after considering the tax benefit.

Let amount borrowed is Rs 100
Interest payment on borrowing (10%) is 10
Tax saved on Interest Paid is Rs 3 (30% of 10)
Cost of debt after tax is Rs 7 (Rs 10-3)

Cost of debt in percentage= (7/100)*100 = 7%