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

Make the debt relatively cheaper Make the debt relatively the dearer Have no impact on the cost of debt None of the above

Make the debt relatively cheaper

Interest paid on debt is a deductible expense for computation of tax liability. Increased use of debt, therefore, is likely to lower the over-all cost of capital of the firm. Where there is an increase in the tax on corporate profit, the debt becomes relatively cheaper. This is because interest rate 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