If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
A) $3,000,000
B) $90,000
C) $300,000
D) $210,000

Question

Quizplus · Accepted Answer

The annual interest payment on the bonds would be 10% of $3,000,000, which is $300,000. However, since the income tax rate is 30%, the corporation can deduct the interest expense from their taxable income, reducing their tax liability. The net cash cost of the borrowing is the interest expense minus the tax savings, which is $300,000 - ($300,000 x 0.30) = $210,000.

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