A recent leveraged buyout was financed with $50M: $12M in equity capital, $20M unsecured debt borrowed at 7% from one bank, and the remaining debt from another bank at 8.5% of, ,. What is the overall after-tax cost of the debt financing if the firm's marginal tax rate is 33%?

Question

Quizplus · Accepted Answer

The overall after-tax cost of the debt financing can be calculated by finding the weighted average cost of the debt and then adjusting for taxes. The total debt is $50M - $12M = $38M. The $20M unsecured debt has a cost of 7%, and the remaining $18M has a cost of 8.5%. The after-tax cost of debt is calculated as the interest rate times (1 - tax rate). So, for the $20M at 7%, the after-tax cost is 7% * (1 - 0.33) = 4.69%, and for the $18M at 8.5%, it's 8.5% * (1 - 0.33) = 5.695%. The weighted average cost is then (20M/38M)*4.69% + (18M/38M)*5.695% = 5.17%.

A Recent Leveraged Buyout Was Financed with $50M: $12M in Equity