If a corporation issued ¥3,000,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

Question

Quizplus · Accepted Answer

The annual interest payment on the bonds is 10% of ¥3,000,000,000, which is ¥300,000,000.

Since the income tax rate is 30%, the corporation can deduct 30% of the interest payment as a tax deduction, leaving a net cash cost of 70% of the interest payment.

Therefore, the annual net cash cost of this borrowing is ¥300,000,000 x 70% = ¥210,000,000.

So the correct answer is D.

If a Corporation Issued ¥3,000,000,000 in Bonds Which Pay 10