On January 1, Year 1, Bluefield Company issued bonds with a face value of $200,000, a stated rate of interest of 10%, and a 20-year term to maturity. The bonds were issued at face value. If Bluefield's tax rate is 40%, what is the after-tax cost of borrowing related to these bonds for Year 1?

Question

Quizplus · Accepted Answer

The after-tax cost of borrowing is the interest expense multiplied by (1 - tax rate). The interest expense is $200,000 * 10% = $20,000. The after-tax cost of borrowing is $20,000 * (1 - 40%) = $12,000.

On January 1, Year 1, Bluefield Company Issued Bonds with a Face