Homework Answers
Cost of borrowing is the after-tax rate of interest for any company since interest payments are tax deductible as per tax laws. So, in the given situation, after-tax rate of interest needs to be determined, which is calculated using below given formula:
After-tax rate of interest = Interest Rate x (1-tax rate)
Interest Rate = 5% or 0.05
Tax Rate = 25% or 0.25
After-tax rate of interest = 0.05 x (1-0.25) = 0.0375 or 3.75%
So, the cost of borrowing for Comey Products is 3.75%, which should be used while comparing leasing v/s purchasing.
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