A firm incurs $40,000 in interest expenses each year.If the tax rate of the firm is 40%,what is the effective after-tax interest rate expense for the firm?
A)$22,000
B)$24,000
C)$27,000
D)$29,000
E)$33,000

Question

Quizplus · Accepted Answer

The effective after-tax interest rate expense for the firm can be calculated as follows:

1. Calculate the amount of taxes saved due to interest expense:

Tax savings = Interest expense x Tax rate 
Tax savings = $40,000 x 0.40 
Tax savings = $16,000

2. Calculate the after-tax interest expense:

After-tax interest expense = Interest expense - Tax savings 
After-tax interest expense = $40,000 - $16,000 
After-tax interest expense = $24,000

Therefore, the effective after-tax interest rate expense for the firm is $24,000. Option B is the correct choice.

A Firm Incurs $40,000 in Interest Expenses Each Year