If a corporation issued $8,000,000 in bonds which pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
A) $4,000,000
B) $120,000
C) $400,000
D) $280,000

Question

Quizplus · Accepted Answer

The annual interest payment is $8,000,000 * 5% = $400,000. The tax shield from the interest is $400,000 * 30% = $120,000. Therefore, the net cash cost is $400,000 - $120,000 = $280,000.

If a Corporation Issued $8,000,000 in Bonds Which Pay 5