Determine the (after-tax) percentage cost of a $50 million debt issue that the Mattingly Corporation is planning to place privately with a large insurance company. Assume that the company has a 40% marginal tax rate. This long-term debt issue will yield 12% to the insurance company.

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Quizplus · Accepted Answer

The after-tax cost of debt is calculated as the interest rate (12%) multiplied by (1 - tax rate), which is (1 - 0.40) in this case. So, the after-tax cost of debt = 12% * (1 - 0.40) = 12% * 0.60 = 7.2%.

Determine the (After-Tax) Percentage Cost of a $50 Million Debt