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 thatrequires it to pay 40 percent income tax, what is the actual net-of-tax interest cost that thecompany incurs?b. What is the effective interest rate that is paid by the company?
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 thatrequires it to pay 40 percent income tax, what is the actual net-of-tax interest cost that thecompany incurs?b. What is the effective interest rate that is paid by the company?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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?
b. What is the effective interest rate that is paid by the company?
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