A firm issues a $100 million bond with a coupon rate of 8%. If the firm pays taxes at the marginal rate of 38%, what is its annual after-tax interest expense?

Question

Quizplus · Accepted Answer

The annual before-tax interest expense is $100 million x 8% = $8 million. The tax savings from deducting the interest expense is $8 million x 38% = $3.04 million. Therefore, the annual after-tax interest expense is $8 million - $3.04 million = $4.96 million. The annual interest payment on the bond is:
$100,000,000 x 0.08 = $8,000,000
The amount of tax deduction due to interest expense is:
$8,000,000 x 0.38 = $3,040,000
Therefore, the after-tax interest expense is:
$8,000,000 - $3,040,000 = $4,960,000.

A Firm Issues a $100 Million Bond with a Coupon