Use the tables for the question(s)below.
Pro Forma Income Statement for Ideko, 2013-2018
Pro Forma Assets & Liabilities for Ideko, 2013-2018

-Compute the after-tax interest expense for a firm with Interest earned from Excess Cash = $1 000, Interest on Debt = $5 000, and a tax rate of 30%.
A)$3 100
B)$2 800
C)$3 300
D)$2 500

Question

Use the tables for the question(s)below.
Pro Forma Income Statement for Ideko, 2013-2018
  Pro Forma Assets & Liabilities for Ideko, 2013-2018
 
-Compute the after-tax interest expense for a firm with Interest earned from Excess Cash = $1 000, Interest on Debt = $5 000, and a tax rate of 30%.
A)$3 100 
B)$2 800 
C)$3 300 
D)$2 500

Quizplus · Accepted Answer

First, we need to calculate the taxable income by subtracting interest expense from interest earned from excess cash:

Taxable Income = $1,000 - $5,000 = -$4,000

Because the taxable income is negative, there is no tax liability on the interest earned from excess cash.

Next, we need to calculate the tax savings resulting from the interest expense on debt.

Tax Savings = Interest on Debt x Tax Rate = $5,000 x 0.30 = $1,500

Finally, we can calculate the after-tax interest expense:

After-Tax Interest Expense = Interest on Debt - Tax Savings = $5,000 - $1,500 = $3,500

Therefore, the correct answer is B) $2,800 (not $3,100 as in choice A, $3,300 as in choice C, or $2,500 as in choice D).

Use the Tables for the Question(s)below