One of the advantages of borrowing is that interest is deductible for income tax purposes.

a.

If a company pays 8 percent interest to borrow $500,000, but is in an income tax bracket that requires it to pay 40 percent income tax, what is the actual net-of-tax interest cost that the company incurs? (Omit the "$" sign in your response.)

Actual net-of-tax interest cost $

b.

What is the effective interest rate that is paid by the company?

1 answer

netoftax=.08*500,000(1-.4)=24,000 check that, I did it in my head.

effective inerest rate=24/500= 4.8 percent
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