A corporation borrows $1,000,000 at a 10% annual rate of interest. The firm has a 40 percent marginal tax rate. What is the true yearly, after-tax cost of this debt (rounded to the nearest $1 if necessary)? A. Zero (because interest expense is deductible) B. $40,000 C. $60,000 D. $100,000 E. $166,667

A corporation borrows $1,000,000 at a 10% annual rate of interest. The firm has a 40 percent marginal tax rate. What is the true yearly, after-tax cost of this debt (rounded to the nearest $1 if necessary)? A. Zero (because interest expense is deductible) B. $40,000 C. $60,000 D. $100,000 E. $166,667

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter6: Accounting For Financial Management

Section: Chapter Questions

Problem 11P: The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are...

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The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
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prn.2
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