the following scenario: ABC company pays federal income taxes at a rate of 35% on taxable...
the following scenario: ABC company pays federal income taxes at a rate of 35% on taxable income.
Compute the company’s annual after-tax cost of borrowing on an 8%, $5 million bond issue.
Homework Answers
ANSWER
As per the given question,
After tax cost of borrowing = Before tax cost of borrowing (1 - t)
8% = Before tax cost of borrowing (1 - .35)
Before tax cost of borrowing = 8% / .65 = 12.31%
Income tax advantage is the before tax cost of borrowing minus the after tax cost of borrowing. The effective cost to the company would be 8% which would have been 12.31% had the tax advantage not been there.
Tax advantage = 12.31% - 8% = 4.31%
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