Logan holds a 7% interest-bearing debt instrument in Glow Co.Glow Co.'s tax rate is 27% and Logan is in a 45% tax bracket.Which of the following statements is correct?
A)The after-tax cost of the debt instrument is 5.11% to Glow Co.and the after-tax value to Logan is 3.85%.
B)The after-tax cost of the debt instrument is 5.11% to Glow Co.and the after-tax value to Logan is 3.15%.
C)The after-tax cost of the debt instrument is 1.89% to Glow Co.and the after-tax value to Logan is 3.15%.
D)The after-tax cost of the debt instrument is 7% to Glow Co.and the after-tax value to Logan is 7%.

Question

Quizplus · Accepted Answer

The after-tax cost of the debt to Glow Co. is calculated as the interest rate (7%) multiplied by (1 - tax rate), which is 7% * (1 - 0.27) = 5.11%. The after-tax value to Logan is calculated as the interest rate (7%) multiplied by (1 - his tax bracket), which is 7% * (1 - 0.45) = 3.85%.

Logan Holds a 7% Interest-Bearing Debt Instrument in Glow Co