A corporation borrows $1,000,000 at 10 percent annual rate of interest. The firm has a 40 percent taxrate. The yearly, aftertax cost of this debt is ___________ .
A) $166,667
B) $100,000
C) $40,000
D) $60,000

Question

Quizplus · Accepted Answer

First, we need to calculate the annual interest expense, which is:
$1,000,000 x 10% = $100,000

Next, we need to calculate the tax savings from the interest expense, which is:
$100,000 x 40% = $40,000

Finally, we subtract the tax savings from the interest expense to get the aftertax cost of debt:
$100,000 - $40,000 = $60,000

Therefore, the answer is D ($60,000).

A Corporation Borrows $1,000,000 at 10 Percent Annual Rate of Interest