If a corporation issued $4,000,000 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) $2,000,000
B) $60,000
C) $200,000
D) $140,000

Question

Quizplus · Accepted Answer

The annual interest cost is 5% of $4,000,000, which equals $200,000. With a 30% income tax rate, the tax savings on this interest expense is $200,000 * 30% = $60,000. Therefore, the net cash cost is $200,000 - $60,000 = $140,000.

If a Corporation Issued $4,000,000 in Bonds Which Pay 5