If a corporation issued $ 4,000,000 in bonds that pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

Name: If a corporation issued $ 4,000,000 in bonds that pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
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Quizplus · Accepted Answer

The annual interest payment is $4,000,000 * 5% = $200,000. The tax shield from the interest is $200,000 * 30% = $60,000. Therefore, the net cash cost is $200,000 - $60,000 = $140,000.

If a Corporation Issued $ 4,000,000 in Bonds That Pay